
Over the 2009 tax season we were all treated to a multitude of ‘Tea Party’ demonstrations. One of the main purposes of these demonstrations, aside from promoting anti federalism in general, was to promote the Fair Tax Act. When I first heard of the Fair Tax Act a few years ago, it resonated with my common sense in a way that peaked my curiosity and I have followed its evolution ever since. Even though I don't like the idea of being associated with right wing extremists, I personally would like to see the 16th amendment to the constitution repealed and the Fair Tax Act ratified in its place.
What is the Fair Tax?
The Fair Tax is simply a 30% exclusive or 23% inclusive national sales tax meant to transfer tax revenue for the government to consumer consumption as opposed to consumer income. There is no difference in practice between the inclusive or exclusive rates. It is purely a semantic argument that proponents and opponents use to confuse the issue and avoid getting to the bottom of things. 23% inclusive means that the tax is included in the cost of the item. If the cost of an item is $100.00, twenty-three of those dollars are paid to the government by the retailer, i.e. $77.00 to the retailer and $23.00 to the government. If you divide $23 by $77 to find the exclusive tax rate, your answer is .298701287. Round this to the nearest hundredth, convert to a percent and you get 30%. Proponents like to use the number 23% and opponents like to use the 30% figure. Even though I understand the proponent’s argument that the sales tax is replacing an inclusive income tax so it should be expressed inclusively, since most people are used to sales taxes being expressed exclusively, I think the proponents shoot their own feet a little by using the smaller inclusive number, making them appear unnecessarily disingenuous. But, all in all, the concept of our government deriving its revenue from our consumption as opposed to our income has more positives than negatives, regardless of what the rate is and whether it is expressed inclusively or exclusively.
First and foremost, a consumption tax empowers the individual. There are no FICA, Medicare, or payroll taxes, so you take home your whole paycheck. You alone get to choose when to pay taxes by deciding to purchase a new good or service. One positive effect resulting from this is the encouragement of savings, which the lack thereof, in my opinion, has resulted in our current financial crisis. Our economy is too dependent on consumer spending and too many industries have been built on the backs of consumers with outrageous credit card balances. The Fair Tax nurtures fiscal responsibility and thoughtful spending both in the individual and the federal government.
A consumption tax will broaden the tax base by incorporating monies from illegal immigrants, illicit individuals and organizations, and tourists. Some estimates suggest that over a trillion dollars a year would be added to the tax base. Criminals spend large sums of their money and right now it is untapped under our current tax system. This, on principal alone, is a very strong reason to support the Fair Tax Act.
The consumption tax is simple. We all know where we stand. When we buy something, we see the tax rate on the receipt. It cannot be fiddled with by lawmakers using convoluted tax codes to confuse the laymen without us knowing. You will not need to hire an accountant or buy software to prepare your taxes. Yet again, this means more money in your pocket. Sorry CPA’s you’ll just have to fry bigger fish or get into information technology or something.
One of the most intriguing and controversial aspects of the Fair Tax Act is the monthly payment of prebates to every legal citizen of the United States. This is meant to prevent the Fair Tax from being a regressive or even a proportional tax. Instead of exempting certain goods considered to be necessities, each household will receive a check from the Social Security Administration. The amount of which will be calculated based on the current Department of Health and Human Services’ poverty level guideline multiplied by the tax rate. This basically ensures that the consumption tax is negated on necessities. A two adult household with one child would receive $468 a month. A one person household would get $199 a month! Yes, even Bill Gates would get this check, but imagine how much Bill probably spends on nonessential luxuries.
Another interesting part of the plan is that the tax is only collected at the point of purchase of a new good or service at the retail level. This is good for business because businesses will not be paying taxes on any purchases used to create their product or grow their organization. This also means that used items are not taxed, including homes! So the frugal minded lower income person trying to better their life can buy used and avoid the tax since it was already paid by the original purchaser. That sounds like some trickledown economics I can get behind.
Opponents claim that the Fair tax would burden the lower and middle class, but I just don’t see how this is possible with the inclusion of the prebate. The tax is effectively zero for the lowest earners and definitely reduced for the middle class. Another argument is that the Fair Tax is not revenue neutral, meaning that it doesn’t generate enough money to pay for itself and match the current system dollar for dollar. This is where economist with bigger calculators than I bicker endlessly, but I say if revenues go down a little, then so be it. The government has become a little too attached to our money and I would like to see our leaders have to reign things in a bit anyway.
The Fair Tax may seem like a long shot, but the idea is growing legs. Support is coming from different parts of the political landscape, which is always a good sign in my book. Our current income tax system, as it stands, is too complex and hinders personal growth. We are taxed every which way, i.e. our income, our savings, our capital gains, our gifts, our estate taxes, current sales taxes, on and on and on. It has to stop; we cannot continue to pass this messy burden off on future generations. The convoluted and expensive income tax system can and should be replaced with one simple consumption tax.