I’ve made a few posts in the past about the Fair Tax. In a nutshell, the Fair Tax would replace all of the existing Federal income taxes, including the Federal Income Tax itself, Social Security Taxes, and Medicare Taxes. It would be a consumption tax on new goods and services (meaning your yard sale items wouldn’t be taxed, nor would your used car). It is estimated that the tax rate would be about 20% if tax revenue levels were left the same. Compare this with income taxes, which are around 10% for those in the middle class, Social Security taxes, which are 6.5% for the employee and the employer, meaning about 13% total, and Medicare taxes, which are about 4% between the employee and employer. This means your paycheck would increase by about 27% in exchange for paying a 20% sales tax. Sounds good to me.
But wait, there’s more. Because businesses would no longer be paying corporate income taxes, and because they would no longer need to maintain a huge staff to handle payroll deductions, tax deferred accounts like 401k accounts, and planning to avoid corporate income taxes, their costs would go down. This might increase profits a little for the shareholders if the company retains some of this savings, but most of that savings in the cost of providing goods and services would go to lowering their prices and raising salaries. It is estimated that most of the 20% sales tax would be offset by the reduction in the prices of goods, meaning that the actual price you pay may be about the same, even including the sales tax.
Having less of a paperwork burden would also make it easier for people to open businesses. If all you had to do was hire people and hand them a paycheck, rather than needing to have an elaborate accounting system to figure out tax withholding and all of the other corporate taxes, more people would be willing to start a business. This would mean more competition for both customers and workers, meaning more selection, lower prices, and higher wages.
The tax is also not regressive because there is a prefund. With the prefund every American would receive an electronic deposit from the government at the start of the year or the start of each month to cover part of the sales taxes. For example, if you wanted the first $20,000 of spending to be tax-free to help low-income earners and the Fair Tax was 20%, you would send a prefund of $4,000 per year to each citizen. This means that even if a person at the low end of the income spectrum spent their whole paycheck, they would not be paying any taxes. If they saved a bit they would be getting a supplement to their income.
I’ve created posts on the Fair Tax before, but have gotten few responses. I also am not seeing the activity needed to get one enacted. Understand that politicians like the current income tax because it both gives them some control over their constituents and allows them to give special favors to big donors, which in turn helps get them re-elected. If they want you to buy special windows or certain cars, they can create a tax deduction for those items. Likewise, they can create special exemptions for coal companies, farmers, or sugar importers and in exchange get donations from those groups who want to keep the special tax break in place. They even use Social Security to control seniors since all incumbents need to do to defeat a challenger that might restore some fiscal sanity to federal budgets is say she will cut Social Security or Medicare and get the seniors out in mass against her. To replace the income tax with the Fair Tax, which would take all of the power away from the politicians and take away all of the ability of the IRS to stoke fear in the hearts of taxpayers, would take an enormous ground-swell of people demanding it be enacted. It might also require some incumbents who enjoy the power they weild and wealth they gain with the existing tax system be replaced.
So my question is, why so little interest? Do you like paying $100 to buy TurboTax each year or $300 to hire an accountant to help with your taxes? Do you like to live in fear of an audit? Do you like to save all of your receipts for business expenses, medical expenses, and write down the mileage from your car odometer after each business trip? Do you like to keep seven years’ worth of tax returns just in case you get a call wanting you to prove your home office expenses from 2008?
I think it would be wonderful to get my whole paycheck rather than what is left after all of the taxes are removed. I think it would be great to just throw out those receipts and not worry about what price I paid for a stock back in 1982. I would love to not need to worry about making deposits to an IRA account before a certain date or worry about the limits for deposits to an HSA. So what am I missing?
Please leave a comment with your reasons for not wanting the Fair Tax if there is something I’m missing. If you support a Fair Tax, how about leaving a comment saying that so others could see this is not some crazy idea. And if you do want the Fair Tax, how about writing a quick email to your Representative and Senators (just search for the US House of Representatives and the US Senate in Google and you’ll get the contact information in a few seconds). And when politicians come calling or the political parties come asking for a donation, how about expressing your desire for a Fair Tax to them. Maybe 2014 could be the last year where you’ll need to file income taxes.
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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.
