President Bush has said that it is time to address income tax reform. The Fair Tax Act deserves a serious look.
House Speaker Dennis Hastert wants it brought to the floor for a vote. Majority leaded Tom DeLay supported it. Over fifty-five Representatives are cosponsoring it presently and more are jumping on board.
The Fair Tax Act (HR25/S1493) proposal covers three basic areas:
** Payroll taxes:
Each payday, I lose 17.5% of my paycheck to taxes (10 % to income tax, 6.1 percent to Social Security, and 1.4% to Medicare). This fair tax proposal would let me keep that entire 17.5%.
My employer would no longer have to pay corporate income taxes or the employer portion of my Social Security and Medicare taxes (another 7.5% of my salary).
Most citizens don’t realize that with our present system, corporations effectively don’t pay income taxes-only consumers do. Corporations and their suppliers simply pass on their taxation costs up the line until the final tax payment is made by the consumer himself through the increase in price of goods bought. This has been true since the income tax was initiated around 90 years ago and will always be true as part and parcel of the very system of income taxation itself.
Economics experts predict that companies would be able to reduce the cost of their product by 25% to 30% by removing these “imbedded taxes” which are presently passed on to the consumer. Market competition would then force companies to lower their prices to remain competitive, and this will happen. Just look at how WalMart has captured market share by offering the lowest prices on most of their products. The market reality is that if prices aren’t immediately lowered, people will simply buy used goods and the retailers not reducing prices ASAP will likely go out of business. Another example of competition at work in the market place is the success of GM in the Summer of ’05, in allowing employee discounts to the entire general public. It only took a month or so for all the other major U.S. car dealers to make the same offer. It worked, pure and simple. More cars were sold, inventories were turned over and the consumer got a better deal.
Under the Fairtax, based on the poverty guidelines, a family of four will receive a check in the mail or by electronic posting directly into their bank account each and every month for $361. This figure will be adjusted every year for cost of living increases.
This prebate will be sent to every household that chooses to register. This ensures that no one would end up paying the sales taxes on the basic necessities of life.
The combination of this prebate and the fact the each citizen would take home his/her entire Gross Paycheck would more than create additional annual cash for anyone to save and invest, use for medical expenses, or accumulate tax-free for down payment for a house. The poor would finally have a chance to become truly part of the “ownership society” and the middle class would become relieved of that increasingly onerous AMT (alternative minimum tax) which originally was intended to only be directed toward the very wealthy.
A national retail sales tax of 23% (or less) would be added to purchases of new goods and services. Used goods would be exempt. Prices of retail items would be expected to drop by at least 20% or more due to the removal of the embedded payroll taxes mentioned previously. Adding the 23% back onto the lower priced item would often result in a “wash”-no real difference in the total paid. In addition, state sales taxes would be figured on the lower cost of the item before the national tax is figured in – Good news for Tennessee citizens who might actually be paying less than they are now.
This proposal would eliminate the need for tax shelters, tax credits, tax offsets, etc. Citizens would no longer be forced to bare their soul to the IRS and be considered guilty until proven innocent when undergoing an IRS audit. (This is the only court in which this is true in America today).
The underground economy (drug dealers, prostitutes, gamblers, illegal aliens, etc.) will end up paying federal taxes when they buy a new car, fancy clothes or glitzy jewelry. Tourists would also be paying into the system every time they make a purchase of a new good in this country.
The IRS would not be abolished but it would be drastically reduced, since its only purpose would be to audit business returns and not oversea personal filings of every single taxpayer in the U.S. Those returns could be simple-“what’s the value of your sales?” – send in 23% of it. Simplification for retailers would be immense.
Compliance costs lost to lawyers, accountants and other people servicing businesses just to figure out and consult with them about the present code would be completely erased. It is important to understand that these are costs that presently do not go into the U.S. Treasury, but are simply subsidizing the present system at taxpayer expense. These costs are a huge anchor on our entire economy.
This proposal would also promote savings, since we would no longer be taxed on the interest we earn or on the gains we make in the stock market. The poor and lower middle class will have more money to invest in these vehicles of saving and increasing income as well, so it will open up their ability to raise their families into increasing wealth and affluence.
The subsequent expected increase in consumer spending would translate into increased manufacturing and subsequent job growth. It has been estimated by statisticians reviewing this Bill that in the first year alone GDP will increase by over 10%.
U.S. companies will be able to sell their goods and services overseas with prices reduced by 20+% under what they have to charge now. Yet, overseas companies will be charged the sales tax when they “import” their goods and services to us. Downsizing by companies that do much of their business overseas will be directly impacted, making it more attractive for them to relocate their tech jobs back in this country as a cost efficiency. It only takes a flick of the imagination to figure out what this will do for our entire country’s economy. The ensuing domestic job creation would spur hiring activity and thus create jobs for many of our present-day jobless population.
? Medicare and Social Security
The Fair Tax will be “revenue-neutral.” meaning that it will fully fund the present $2+Trillion per annum total cost of funding all of our present government programs. It will fund Social Security and Medicare-both systems which are in dire need of reform.
Though it will not address any reform proposals in these systems, which are separate matters being proposed in Congress today, it will take care of the funding of them, rendering much of the burden of those system reforms considerably easier and less costly. In essence, enactment of these bills in Congress will kill two birds with one stone, so to speak. It will allow them to legislate Medicare and Social Security reform more carefully and with the most cost-effective proposals. It will replace the present system of demographic funding of the programs on the backs of present workers with funding from every purchase made in the country. Since the tax base from retail sales will be immensely larger than that of the ever-diminishing payroll taxation of these two programs at present, the two systems will be fully funded and solvent until the time that Congress wishes to buckle up and initiate true reform in these two programs.
In closing, I would like to note that included in these proposed bills is an item that addresses any pre-conceived notions about abuse of the new Fairtax system: To raise or increase the proposed 23% will require majorities in the House and Senate to approve any such measure. Any proposal to raise taxes will be totally exposed to public scrutiny, unlike the “secretive” system now in place with our present income tax-based system.
This idea has been more than 10 years and $22 million in the planning. It may not be absolutely perfect but it’s a near it as anything I’ve ever seen and nothing like it has ever been proposed before, so comparing it to any other model is a wasted effort. It sure beats the heck out of the out-of-control system of income-based taxation we have now. Though this Bill is Republican sponsored, Democrats And Republicans across the board ought to jump on this plan with both feet for its Fairness, its elegance and simplicity, and its Progressiveness.
Just recently, a candidate for a major office in Brazil made an appointment to visit the sponsors of the Fairtax just so he could examine it and incorporate it into his reform platform. Chile, Ireland, and Russia have had booming economies since they initiated ther flat taxes. They will continue to flourish as long as those taxes remain flat. But anyone who believes a politician goes to Washington simply from a sense of civic duty and public service is listening to the tooth fairy, and it’s becoming increasingly apparent to the American taxpaying public how corrupt our system has become. Yes, there are good men in Washington, but they can be counted almost on the fingers of both hands. One of them is John Linder, who sponsored this bill in the Senate from the state of Georgia. A flat tax is good, but No flat tax will ever stay flat. History has proven that. As long as we have an IRS and an income tax system that can be manipulated by back room deals under cover of night, so to speak, we will never know true tax reform. We began with less than 1% tax on overseas business in 1913 and just look at the obscenity that our tax code is now. The sheer length of the code is unbelievable and it grows every session Congress convenes to give more favors to those who can pay and take from the unsuspecting public. No, a flat tax is all well and good, but the system itself will soon allow unscrupulous lawmakers to corrupt it again and it will grow and grow, only to find that we’ve all been duped once again. The only reform that will save our country for our children and ensure prosperity for them and for all hardworking taxpayers is the Fairtax. The plan is non-partisan, elegant, simple, and that is why so many people fear it. It gives transparancy to paying taxes. Any measure to raise the tax rate would have to pass Congress and it would be political suicide for legislators to make such a proposal without a clear consensus from the American people. A wealth of information is available on the site online at www.fairtax.com.
Taxation is not a “sexy” or intriguing reform issue because so many Americans don’t have a clue when it comes to even basic household economics, much less national economy. But the Fairtax site really explains very well some elementary facts about taxation in general and it is loaded with references from economists and accountants clarifying some of the murky areas of taxation that are backed up by historical data. Though taxation is a “dry” issue and a boring one to most people, it is possibly the one reform that will affect our lives directly and our children’s and grandchildren’s lives for decades to come. It will impact our quality of life, our security, our freedom and control of a bureaucratic govt. that has grown self-indulgent and indifferent to the needs of its people for far too many generations. We can change that if we have the will.