FairTax

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A pro FairTax rally in Florida

The FairTax is a tax proposal that would replace all federal income taxes — including corporate tax, gift tax, estate tax, capital gains tax, alternative minimum tax, Social Security, Medicare, and self employment taxes — with a federal national retail sales tax on personal consumption. The tax would be paid on the purchase of all new goods and services, and would be collected at the final point of sale.[1] Thus, instead of taxing "income", the FairTax would tax spending. This is known as a consumption tax — a method for taxing income on the back end, when the money is spent, rather than when it is earned.

A consumption tax would have a positive effect on savings and investment.[2] Supporters state the plan would ease tax compliance, increase economic growth, have incentives for international business to locate in the U.S., and increase U.S. competitiveness in international trade.[3] The rate for the FairTax as proposed under current legislation is 23 percent of the total payment including the tax ($23 of every $100 spent in total—calculated similar to income taxes).[4] This would be equivalent to a 30 percent traditional sales tax ($23 on top of every $77 spent—$100 total). Although some critics say it would be higher to be revenue neutral (take in the same amount as the current system).[5] The effective tax rate for a family household would be variable due to the fixed monthly tax rebates.

The proposal includes monthly payments to all family households of lawful U.S. residents as an advance rebate, or 'prebate', of tax on purchases up to the poverty level. The rebate is meant to eliminate the taxation of household necessities and make the plan progressive. Used goods, exports, and intermediate business transactions would not be taxed, nor would savings, investments, or education tuition expenses as they would be considered an investment (rather than final consumption). The tax is voluntary to the extent that individual consumers can choose when to increase or decrease their product buying, unlike now, when income taxes are withheld from the paychecks of most workers.

Contents

Proposal

If passed, the Fair Tax would accomplish the following:[6]

  • Abolish the Internal Revenue Service (IRS).
  • Abolish personal and business income taxes and replace it with a national retail sales tax.
  • Repeal of the 16th Amendment through companion legislation.
  • Provide each worker a monthly prebate, equal to the tax on "poverty level" income.[7]
  • Close many loopholes under the current system.
  • Enable retirees to receive their full pension, untaxed, until they spend it.
  • Enable workers to keep their entire paycheck, untaxed, until they spend it.
  • Proponents believe the removal of the above will save 265 billion dollars a year in compliance costs under the current tax system,[8] and be more practical than the current system, which includes over 60,000 pages of tax code.[9]

History

1994-2005

Congressman John Linder, one of the strongest proponents for the FairTax, illustrates the size of the current tax system vs the FairTax method

The origins of the FairTax began with a group of businessmen from Houston, Texas, who initially financed what has become the political advocacy group Americans For Fair Taxation (AFFT) or FairTax.org, which has grown into a large grassroots tax reform movement.[10]. The Chairman of AFFT, Leo Linbeck, stated that Americans have to pressure the government to come up with a better way of taxation, he said, “It is painfully obvious that Washington, D.C. insiders so closely linked with the status quo cannot be trusted to overturn the corrupt system of federal taxation. This effort will have to be driven by the American people[11]." The organization hired experts to look into an idea for a better tax system, they spent 23 million dollars in coming up with the idea of the Fair Tax. Their findings were combined into a book, “The FairTax Book: Saying Goodbye to the Income Tax and the IRS,” which Linbeck co-authored with Republican Congressman John Linder[12].

The FairTax became popular among free market conservatives, libertarians, and some economists in recent years. The complication and wasted bureaucracy of the Internal Revenue Service, government pressure on citizens to reveal information and records, and the loopholes in the current tax system created the incentive to look for a new way of taxation in the United States. Some Democrats also sought a tax system that would rid them current income tax, which they claim to be discriminate.

In the last 20 years the United States tax system has been changed over 14,000 times, this has led to an abundance of complexities which lead to its being an inefficient system. In 2003, United States Senator Saxby Chambliss, a Republican, and Senator Zell Miller a Democrat; introduced a by-partisan version of the Fair Tax. Although the bill had some support in the Senate, it eventually lost in a 50-50. Senator Sam Brownback later stated the challenges of tax reform, “When you take (the tax code) on straight on, you take on every lobbyist,"

2005-2007

Former Federal Reserve Chairman, Alan Greenspan, called for a federal sales tax to replace the broken income tax in 2005. "Since the exemplary 1986 reform, the tax code has drifted back to be overly complicated and burdened by higher marginal rates and by many special provisions that have undesirably narrowed the tax base," Greenspan stated at a Presidential Advisory counsel[13].

In 2005 congress created a bill to enact the FairTax (H.R. 25; Senate Bill 1943), it had the support of more then 54 co-sponsors, and both Senate and House minority leaders Dennis Hassert and Tom DeLay[14]. Although the bill received the most support ever for any fundamental tax reform bill, it failed to pass. After the elections of 2004, Georgia Republican Congressman, John Linder, reintroduced the FairTax on the first day of the 109th congress[15]. Congressman Linder stated before congress, “The time is ripe for fundamental tax and a completely new Federal tax regime. I am pleased to reintroduce my Fair Tax proposal today reform, and look forward to the Congress creating a fairer, simpler tax system that advances our core goals of lower taxes and more freedom for our citizens."[16].”

In 2007 support for the FairTax bill grew to include 60 co-sponsors[17].

One of the most outspoken supporters of the Fair Tax is Republican presidential candidate, Mike Huckabee. Huckabee has said that the Fair Tax would "put the IRS out of business, but put Americans in business[18]."


Supporters and Opponents

A FairTax bus during a rally at the 2007 Republican Iowa Straw Poll.

Most of the support for the FairTax comes from the Republican Party and the Libertarians. A significant number of Conservatives want Republican presidential candidates to support the FairTax, including one Indiana group called ‘Hoosiers for Fair Taxation’[19]. [20]. Nevertheless, while the number of the members of Congress who have signed on to the proposal has been growing, it still lacks popular support to be close to passage. Former Arkansas governor and presidential candidate Mike Huckabee made passage of a national sales tax a part of his platform during his recent bid for office. Former Federal Reserve chief Alan Greenspan also exhibited support for the FairTax in a recent interview.[21]

Of the 2008 Democrat presidential candidates, only Mike Gravel supported the plan. Rudy Giuliani, a one time candidate for President on the Republican side, was hesitant and did not support it.[22]: "I don't think a Fair Tax is realistic change for America. Our economy is dependent upon the way our tax system operates[23]

Former Republican governor of New Mexico and current Libertarian Party candiate for president Gary Johnson (who also sought the GOP nomination in 2012 before switching parties) is also a supporter of the FairTax. He has said that while there is no such thing as a "good tax", the FairTax is the "best of the worst". He acknowledges that the FairTax is not perfect, but feels it is the best option at the moment.

Mitt Romney wrote in his 2010 book, No Apology: The Case for American Greatness, "One challenge with the fair tax is that the very rich would see their taxes go down--a lot. If Bill Gates makes about a billion dollars a year on his investments, for example, his current taxes would be at least $200 million. Let’s say he spends $50 million on himself and his family every year--which is a huge sum and I doubt he spends that much, but let’s use it for illustration: Under the fair tax, Bill Gates would pay “only” about $17 million in taxes--his tax bill would thus drop from $200 million to $17 million. The Wall Street Journal found that the enormous amount saved by the wealthiest under the fair tax would be made up by a higher tax burden on the middle class."

William Gale, of the Urban-Brookings Tax Policy Center, has suggested that a pseudo-consumption tax could be implemented under the current American income tax system. In this, all citizens would have an Individual Retirement Account, but one with no restrictions and limitations, into which all income is deposited. A citizen would essentially use this is a check-writing bank account, with funds only being taxed when they are withdrawn (consumed) to make purchases. This system would approximate the FairTax, but without rebates.

Criticism

  • Critics contend that the FairTax would have Constitutional issues.
  • The FairTax would benefit the rich most, because they tend to spend a lower proportion of their income. The name 'Fairtax' therefore seems to be a misnomer.
  • There would still be tax evasion with the FairTax. Purchases made overseas, although subject to the tax and collected by the U.S. Customs and Border Protection, would be difficult to track and therefore evasion could occur, as much as or more than it does now under the current system.
  • A greater dependence on second-hand goods would very likely occur, since they would be exempt from this tax, and therefore alter the spending habits of the U.S. consumer and damage industry.
  • There is no cap on the rate that might be imposed by Congress. Just as current income tax rates change, the initial rate of 23% may be changed over time as Congress desires. However, since there is one rate, it would be difficult to engage in class warfare and pit one economic group against another — Congress would raise or lower the rate on everyone. Every citizen has an interest in keeping the rate low.
  • Many claim that due to the nature of politics, while the FairTax might be enacted, all or part of the existing income tax might be preserved, resulting in the federal government having two means of taxation. The proposed FairTax legislation has a sunset clause that would eliminate the tax in seven years if the 16th Amendment is not fully repealed. However, there is no guarantee that the sunset clause would not be removed from the legislation prior to passing or later repealed by Congress.
  • Like an income tax, a sales tax has its own implications with regard to personal privacy rights.

External Links



References

  1. Americans For Fair Taxation, “About the FairTax,” http://www.fairtax.org/site/PageServer?pagename=about_main
  2. Auerbach, Alan J. "A Consumption Tax", The Wall Street Journal, 2005-08-25. Retrieved on 2008-02-05. 
  3. Boortz, Neal; Linder, John (2006). The FairTax Book, Paperback, Regan Books. ISBN 0-06-087549-6. 
  4. "Embedded Taxes Change Fair Tax Analysis",http://www.roanoke.com/editorials/commentary/wb/wb/xp-51569
  5. http://www.factcheck.org/taxes/unspinning_the_fairtax.html
  6. American For Fair Taxation, http://www.fairtax.org/site/PageServer?pagename=about_main
  7. Just how fair is the ‘Fair Tax’ CNN Money, September 2005, http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/
  8. http://www.fairtax.org/site/PageServer?pagename=about_fairtax_four#neutral
  9. 67,204-Page Code Confounds Taxpayers, Yet Congress Sits By, USA Today, http://www.usatoday.com/news/opinion/2007-04-03-edit_N.htm?csp=34
  10. Just how fair is the ‘FairTax’ CNN Money, September 2005, http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/
  11. Americans For Fair Taxation http://boortz.com/nuze/200510/10132005.html
  12. “The Fair Tax Book”,2005, http://www.amazon.com/Fair-Tax-Book-Saying-Goodbye/dp/0060875496/ref=sr_1_1/102-3275846-3467353?ie=UTF8&s=books&qid=1184106196&sr=1-1
  13. Greenspan: "Consumption Tax COuld Help Economy",http://www.foxnews.com/story/0,2933,149298,00.html
  14. “The FairTax: A Trogan Horse For America,” Jews For Preservation of Firearms Ownership, http://www.jpfo.org/fairtax.htm#fn1
  15. “Linder Reintroduces FairTax Legislation”, http://www.johnlinder.com/News_Details.asp?NewsID=128
  16. “Linder Reintroduces FairTax Legislation”, http://www.johnlinder.com/News_Details.asp?NewsID=128
  17. FairTax Gains Support, http://www.fairtaxblog.com/20070508/record-sixty-co-sponsors-for-fairtax-bill-hr-25/
  18. Massachusetts For Mike Huckabee, http://massachusettsforhuckabee.blogspot.com/search/label/Tax%20Plan
  19. ”FairTax Supporters Vent Frustration”, June 2007, http://www.theindychannel.com/news/13651607/detail.html
  20. ”FairTaxer's continue to “flex their muscles”, July 2007, http://www.fairtax.org/site/PageServer?pagename=news_feature
  21. Greenspan: Consumption Tax could Help Economy, Fox News, March 2005, http://www.foxnews.com/story/0,2933,149298,00.html
  22. “Giuliani Jeered For Opposing Flat Tax”, Associated Press, July 2007, http://www.forbes.com/feeds/ap/2007/07/07/ap3891710.html
  23. “Giuliani Jeered For Opposing Flat Tax”, Associated Press, July 2007, http://www.forbes.com/feeds/ap/2007/07/07/ap3891710.html
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