Understanding the FairTax

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Permalink Reply by Faith Stuart on January 15, 2009 at 8:49am

This is a great time of year to look at this. I got my booklets for doing my taxes. All year I have no idea what I will paying. Not until I get these booklets. I don't have a lawyer or accountant to figure out loopholes or creative ways to keep my wealth. All I have to fall back on is my ability to read and understand these booklets.

Then there's other things.
Deductions- If I didn't have the house with it's interest payments and a report of gifts we've given, our state tax would be way more than the 2000 it is.
Child Tax Credit- If we didn't have 3 kids which gives us a credit of 3000, our federal tax would be 2996.

I understand the need to be taxed. But this "not knowing ahead of time" puts even the most disciplined and organized person in a financial crisis. It's ridiculous but not funny.

If the liberals really want the wealthy to "spread it around" then why aren't they supporting the idea of getting rid of the loopholes the wealthy have been depending on to keep their wealth? Who are we really fighting on this issue?

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Permalink Reply by Sam Richardson on January 15, 2009 at 9:52am

Although the FairTax has quite a few proponents on our side of the aisle, I am not one of them. While I do believe the IRS (and other Federal departments, such as Education) needs to be dismantled, the means of funding the Federal Government is a separate issue. The FairTax has the following characteristics which I strongly object to:

1) It is a hidden tax. Not unlike the Value Added Tax (VAT) found in Canada, Israel and most of Europe, since the tax is built into the cost of regular consumer products, it is easy for the government to increase the tax by the smallest margins which do not register with the tax payer - it is presumed the cost increase is due to "normal" inflation.
2) The FairTax retains the unethical practice of forcing private companies to act as unwilling and unpaid agents of the Federal Government.
3) The FairTax artificially inflates the cost and perceived value of a given product. When a given product begins to loose real value on the market, there is an incentive for the government to artificially support that product or industry to maintain the income provided through the sale of that product. Such market intervention is always detrimental to the economy as a whole.

The FiarTax.org web site lists 8 benefits of this funding plan:

• Enables workers to keep their entire paychecks
• Enables retirees to keep their entire pensions
• Refunds in advance the tax on purchases of basic necessities
• Allows American products to compete fairly
• Brings transparency and accountability to tax policy
• Ensures Social Security and Medicare funding
• Closes all loopholes and brings fairness to taxation
• Abolishes the IRS

There is an alternative plan which accomplishes all of these goals while concurrently removing the burden of tax collection from private enterprise and forcing the tax payer to be cognizant of the actual taxes they pay on a regular basis: The Flat Tax. Under the Flat Tax (http://www.heritage.org/Research/Taxes/bg1866.cfm) there would be a single tax rate which would be applied to all families over a certain income threshold, eliminating the need for a "prebate" and the bureaucracy required for tax administration, thus shrinking the size of the Federal Government that much more. The tax would be paid directly by the tax payer on a monthly or quarterly basis, greatly reducing the burden on employers while keeping the cost of big government ever present in the minds of voters.

My own feeling as to why the FairTax has gained popularity over the Flat Tax is the issue of hidden taxation and corporate servitude vs. direct tax paying by the voter. Legislators simply do not want the additional accountability.

We should discuss these ideas further. A public forum is a great idea.

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Permalink Reply by Carrie Wigal on January 15, 2009 at 3:07pm

Sam Richardson said:

Although the FairTax has quite a few proponents on our side of the aisle, I am not one of them. While I do believe the IRS (and other Federal departments, such as Education) needs to be dismantled, the means of funding the Federal Government is a separate issue.

Well, we can agree that the IRS needs to be dismantled.

As for the FairTax...

I'm not sure that I see how it is "a hidden tax". It's not an embedded tax. It's a tax applied to all new merchandise purchased by the end user...just like a sales tax. If you don't buy "new" goods, you don't have to pay the tax. The retailer only pays the tax as it is collected from the consumer. The FairTax plan explicitly states what the rate would be: 23%. I don't believe it varies.

Here's a document that compares the FairTax with the Flat Tax put out by Fairtax.org.

The difference that I can plainly see is that the FairTax is a consumption tax, levied at the point of sale. It is not an income tax, levied based on production. If you consume more, you pay more. However if you are incredibly successful and make a lot of money, you are not penalized for your success. If you choose to spend all your wealth, then yes, Uncle Sam will get his share.

One idea behind the plan is to not discourage people from striving to make more money. As it is now, folks are discouraged by our tax structure from making "too much money"...if you make too much, you end up paying more in taxes.

As for who is responsible for remitting the tax to the government... private businesses are already required to file a sales tax in most states...this would not be much different than that. And to be quite honest, coming from someone who is required to file a monthly sales tax report for my business, I would MUCH RATHER file that report (& remit the dollars) on a monthly basis (even daily if need be) than file a federal income tax annually. It is a breeze compared to the hassle of a Form1040 and all its extra schedules.

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Permalink Reply by Sam Richardson on January 18, 2009 at 10:23pm

Carrie,

I think we might be talking past each other :-)

The "hidden" aspect of the FairTax is the same as the sales tax today and the VAT found in other countries - since it is included in the cost of merchandise people (consumers) are not consistently and consciously aware of the tax they are paying and, thus, have less incentive to hold their elected officials accountable for the amount of the tax being levied and the way the tax dollars are spent. Psychologically, the consumer views the dollars that they pay for a given product as going to the retail establishment, not the government.

As I stated above, part of the point of the fair tax is to remove the unethical (and, according to some legal minds, illegal) practice of forcing private enterprise to act as a government agent. This would save both small and large business *billions* of dollars annually that could go into R&D, employees, capital investment, etc.

As you may have guessed, I dismiss the arguments made by the Americans for Fair Taxation organization. In brief, they (explicitly) leave the essence of the current bureaucracy in place (producing a much smaller reduction in the Federal Government than the Flat Tax) and they set up "what if" straw men based on non-compatible foreign (Russian!) models that are quite easy to knock over. We can go over the specifics in detail at some point if you like.

I will again fall back on my presumption as to why the FairTax is more popular - because it is not as radical and does not hold law makers to the same degree of accountability.

Faith - the Flat Tax plan provides for *no* taxes to be paid until a household exceeds $35,000. Thus, if you make less than that - no taxes at all. And, there is no bureaucracy required (or paid for!) to give you a "prebate" for any taxes paid below that threshold - because you won't be paying any taxes. As well, there is no need for a the wealth redistribution provided for in the Child Tax Credit - again, because no taxes are collected from lower-income families in the first place.

The two deductions that most proponents of the Flat Tax feel would be beneficial to retain (yet no accountant would be required) are charitable contributions and home mortgage interest.

I do hope that helps to clarify my position.

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Permalink Reply by Carrie Wigal on February 4, 2009 at 3:07pm

Hi Sam,

I wanted to revisit this discussion because I think there's still confusion here.

The FairTax is not a hidden tax. It is calculated at the point of sale, just like sales tax. There's no guessing involved, the rate is plainly 23%. It is not included in the cost of merchandise, it's tacked on.

Perhaps this is where the confusion lies: The way it is now, payroll & corporate income taxes are embedded in the price of a product. For example, if you buy a widget for $10 and the actual "wholesale cost" (the price paid by the retailer to obtain the product for resale) is $4, there's a "gross profit" of $6. However, there are other costs involved in running the business such as payroll expenses, office supplies, advertising expenses, payroll taxes, corporate taxes, and other business expenses. These costs/expenses eat up the gross profit, so one widget may end up having an additional cost of $4 (to cover all these added expenses), making the net profit $2 (10 - 4 - 4 = 2). Well if the retailer wants to have a higher net income per widget, he must either raise the retail price or lower business expenses. The taxes mentioned here are embedded in the price of the product. The consumer has no idea how much is going towards the actual cost of the product, let alone the added business expenses (including corporate/payroll taxes).

With the FairTax, there are no payroll or corporate income taxes, so these don't calculate in with the other business expenses (like advertising, supplies, etc), so the additional cost to cover these added expenses may only be $2, yielding a net profit of $4 (10 - 4 - 2 = 4). If he wants to maintain the same net income/widget as he does today (and remain competitive), he can lower his retail price to $8. Then consumers would pay the retailer $8 (which covers the total cost of the product plus the retailer's profit) plus 23% tax for a grand total of $9.84.

In both examples the consumer pays about the same price ($10), the retailer makes the same profit ($2), except with the FairTax, the consumer knows exactly how much he/she is paying in taxes (directly or indirectly), the retailer does not have to pay to comply with payroll/corporate taxes (which is an added expense besides the actual tax)...and everybody is happy. Like I said before, I imagine the retailer having to remit the FairTax collected at the point of sale is similar to sales tax remittance, which is a breeze compared to calculating/remitting payroll taxes.

The biggest difference I see between the FairTax and the Flat Tax (and our current tax structure) is that the FairTax is based on consumption, whereas the others are based on income. The FairTax plan does not penalize productivity...you don't pay more taxes simply because you make more money. You pay more when you consume more. You pay less when you consume less. It really is simple.

The "fairness" aspect of it is everyone (including criminals, illegal aliens, etc.) has to pay. Right now, there's only like half the people living in this country actually paying income tax, and we're footing the bill for the other half of the country. And if you make more money because you worked harder, and smarter than the next guy, then you get to pay more of their expenses through your higher taxes. How fair is that?

With the FairTax, everyone pays based on consumption. You can make as much money as you want in America, and Uncle Sam has no claim on your earnings. I love it!

I Strongly Recommend taking a second look at this plan.

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Permalink Reply by Carrie Wigal on February 4, 2009 at 3:20pm

Oh, and on the flip side, as a wage earner, you get to bring home your whole paycheck. So if you make $10/hour and work 40 hours/week, you actually bring home $400 at the end of the week, as opposed to just $280. That's about 30% more money in your pocket to do whatever you want with...pay bills, buy stuff, save or invest.

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Permalink Reply by Faith Stuart on March 30, 2009 at 9:04am

"forcing private enterprise to act as a government agent"
I have to look into this more to understand what you mean by this.

But I did go to the link you put up. It sounds like just reforming what we have. But I can see that this is a pretty complicated subject.

I do see the benefit on a consumption tax.
When I go to the store I know the sales tax is 5%. All of the tags, stickers or signs advertising the price doesn't include the 5% tax. That's not hidden. But that is the state tax right? 1% of it comes back to the locality?
I'm under the impression that taxes are hidden in my phone bill, the products I buy, the services I buy... The 5% (2.5%) tax is the only one not hidden.

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