So today is tax day in America yet again. Sometime in the last few months you probably had to gather your receipts, W-2 forms, and 1099’s. You had to buy some tax software or set up a meeting with an accountant. Either way, you were out at least $100 because the forms are too complicated to someone to just fill out. You then spent several hours away from your family filling in information. You probably also had to call various places for receipts, send money or letters of authorization to transfer money into IRAs and HSAs before the deadline. You then needed to go to the post office and stand in line to send in your forms, or sent them in electronically despite warnings from the IRS that many tax returns are being stolen each year when filed electronically and the information used for identity theft. You do all this because the law says you need to in order to pay your taxes.
If you’re like most people, you probably also got a big refund check back. You may look forward to receiving that check, and maybe you use it to pay down a credit card bill or just blow it on something, but realize that is your money that the government had all year-long without paying you a dime of interest. Maybe you paid credit card interest all year because Uncle Sam was holding onto that money. At 15% per year, that’s $600 per year you are losing if your refund is $4,000. Even at $2000 per year, that’s $300 you are losing.
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There is a better way and it’s called the Fair Tax. With the Fair Tax you would receive your entire paycheck each month with no deductions taken out so your paycheck would be at least 20% bigger. You wouldn’t pay a dime in taxes until you bought a new item, at which point you would pay a sales tax. That would be the end of your obligation as far as taxes went. You wouldn’t need to save any receipts. You wouldn’t need to file anything. You would pay at the cash register and then go on with your life.
One argument against a sales tax is that it is regressive since people who make less spend a higher percentage of their income. This is also addressed in the Fair Tax with a prefund. Each year (or each month) everyone who works would get a deposit in their accounts from the government to cover a portion of the sales tax they pay. For example, if the Fair Tax is 20% and you wanted to make sure no one who made less that $30,000 paid anything in taxes, you would issue a prefund of $600 per year to everyone. Then the prefund would cover the taxes on the first $30,000 you spent. Only those spending more than $30,000 per year would then be paying taxes. You could set the prefund as high or as low as you wished depending on how much you needed to collect in taxes and at what income threshold you wished people to start paying taxes.
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Another argument is that people don’t want to be paying a 20% sales tax (an estimate for the sales tax that would be needed to raise the same amount of money as is currently raised through the payroll taxes and income tax). Realize first of all that you are already paying 12% or more of your income out before you get your check. Including the employer match for Social Security and Medicare, you are paying around 20%. This is not just on the money you spend, but also on the money you save. It is also expected that because retailers will no longer need to spend as much money on tax planning, and because they would no longer pay income tax on their earnings, that prices would fall, perhaps by enough to cover most, if not all, of the sales tax. It is very likely that the government will be raising the same amount in taxes while you are paying a lower percentage of your (increased) income in taxes.
If this sounds great to you, go to www.fairtax.org. learn more, and learn how you can help get the Fair Tax passed. Let’s have 2016 be the last year you need to spend time away from your family filling out forms.
What do you think? Don’t like the Fair Tax? Why not? What do you think is the best way to collect taxes? Please leave a comment.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
