Difference between revisions of "FairTax"

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Thus, instead of taxing "income", the FairTax would tax expenses. 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. The estimated rate for the FairTax would be 23 percent<ref> "Embedded Taxes Change Fair Tax Analysis",http://www.roanoke.com/editorials/commentary/wb/wb/xp-51569</ref>, although some critics say it would be closer to 33%.<ref> http://www.factcheck.org/taxes/unspinning_the_fairtax.html</ref><br />
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Thus, instead of taxing "income", the FairTax would tax expenses. 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. In theory this would also allow the government to secure revenue from those who avoid paying taxes such as drug pushers of prostitutes, but who would still need goods and therefore pay under a FairTax system.  The estimated rate for the FairTax would be 23 percent<ref> "Embedded Taxes Change Fair Tax Analysis",http://www.roanoke.com/editorials/commentary/wb/wb/xp-51569</ref>, although some critics say it would be closer to 33%.<ref> http://www.factcheck.org/taxes/unspinning_the_fairtax.html</ref><br />
  
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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.  Second-hand goods are not taxed under the current proposal and consumption of necessities, such as food, are offset for the poor based on prebate checks sent from the government to U.S. citizens.  It is estimated that 90% of U.S. households would pay some tax on these items.<ref>http://pubdb3.census.gov/macro/032007/pov/new04_100_01.htm</ref>  
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Though frequently advertised by supporters as a "voluntary" tax, this is not entirely true. Consumers can indeed forestall the tax by choosing not to spend money, or by electing to purchase only second-hand goods (which are not taxed under this proposal). However, at some point, all consumers must purchase new goods and services, including various necessities such as health care, food, fuel, phone service, etc., at which point the tax would no longer be "voluntary" but mandatory. To help counter this effect -- and to make the tax more "fair" -- expenses such as those listed would be offset to a certain degree by a "prebate" -- a monthly check issued by the government to each worker. However, given the income level of most Americans, the vast majority of citizens (about 90%<ref>http://pubdb3.census.gov/macro/032007/pov/new04_100_01.htm</ref>) would end up paying some measure of tax on these items, prebate or no. The FairTax would therefore operate in direct conflict with the Constitution, which prohibits Direct taxes (those paid on the necessities of life, or on any [[unalienable right]]) without apportionment. Legal challenges to the tax would probably emerge shortly after its passage and lead to nullification by the U.S. Supreme Court for violating Article I, Section 9. (See Criticism below.)
 
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Revision as of 15:55, April 21, 2008

A pro FairTax rally in Florida

The FairTax is a tax proposal that would replace all federal income taxes -- including corporate, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self employment taxes -- with a federal sales tax. The tax would be paid on the purchase of all new goods and services, and would be immediately collected at point of sale. [1]


Thus, instead of taxing "income", the FairTax would tax expenses. 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. In theory this would also allow the government to secure revenue from those who avoid paying taxes such as drug pushers of prostitutes, but who would still need goods and therefore pay under a FairTax system. The estimated rate for the FairTax would be 23 percent[2], although some critics say it would be closer to 33%.[3]

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. Second-hand goods are not taxed under the current proposal and consumption of necessities, such as food, are offset for the poor based on prebate checks sent from the government to U.S. citizens. It is estimated that 90% of U.S. households would pay some tax on these items.[4]


Proposal

If passed, the Fair Tax would accomplish the following[5]:

  • Abolish the Internal Revenue Service (IRS).
  • Abolish personal income taxes.
  • Repeal the 16th Amendment.
  • Provide each worker a monthly prebate, equal to the tax on "poverty level" income. [6]
  • 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.[7]

History

1986-2005

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

The modern Fair Tax idea was originally the brain-child of the Scientologists, as part of their ongoing battle with the IRS. The most popular of initial plans for the Fair Tax was designed by Americans for Fair Taxation (AFFT), which is led by businessman Leo Linbeck[8]. 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[9]." 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[10].

The FairTax became popular among free market conservatives, libertarians, and some economist 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[11].

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[12]. 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[13]. 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."[14].”

In 2007 support for the FairTax bill grew to include 60 co-sponsors[15].

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[16]."


Support

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’[17]. [18]. 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.[19]

Proponents of the FairTax argue it would be more practical than the current system, which includes over 60,000 pages of tax code.[20].


Criticism

  • None of the 2008 Democratic presidential candidates support the FairTax, although Mike Gravel has indicated he supports a new kind of system based on consumption (expense) rather than income.
  • Republican presidential candidate Rudy Giuliani criticized the FairTax when he addressed a group at the University of Florida in July, 2007[21]: "I don't think a Fair Tax is realistic change for America. Our economy is dependent upon the way our tax system operates[22]."
  • Aside from a lack of enthusiasm among most politicians, the FairTax also suffers from serious constitutional infirmities. Supporters have tried to paint the tax as an "excise". But this is wrong. The constitutional definition of an excise is a tax that is strictly limited to privileged or luxury goods and activities. The writings of the Founding Fathers, as well as numerous U.S. Supreme Court and lower court rulings, confirm this definition.[23] However, the FairTax encumbers necessities in addition to privilege and luxury items, thus making it a Direct tax within the constitutional meaning of the term. Unlike true excises, the FairTax cannot be "avoided" because it taxes things which are necessary to live. These include food, clothing, rental and new housing, transportation, medicine, health care, arms for self-defense, phone service, sundries, etc. Any tax that encumbers such items must be apportioned among the states, or it violates the Constitution.
    Although proponents suggest that necessities are effectively relieved from the tax by virtue of the prebate, the fact remains that necessities are taxed. Furthermore, once an individual's spending on necessities exceeds the poverty level, the prebate no longer offsets the tax, and the tax operates fully as an unapportioned Direct tax, in violation of the Constitution. In Brushaber v. Union Pacific Railroad Co. (1916), the Supreme Court ruled that whenever any "excise" morphs into a tax on items of common right (such as anything necessary to preserve and carry out a normal life) "the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it." Regardless of whether the FairTax is called an "excise," it is, in substance, a Direct tax which cannot be apportioned among the states. It is therefore unconstitutional.
  • Another problem with the FairTax (although less serious than any constitutional challenge) is that it would fail to close all loopholes. For example, purchases made overseas, although subject to the tax, would be difficult to track. This could lead to the movement of U.S. dollars offshore, accompanied by individual and corporate "hoarding," and a loss of revenue for the government.
  • Further, in an effort to avoid the tax, many people would be inclined to buy only second-hand goods. This would reduce the demand for new goods and affect the growth of the economy.
  • Finally, the FairTax shares at least one major flaw with the current income tax system: There is no cap on the rate that might be imposed by Congress. If the FairTax were to become law, the rate might be initially established at 23%, as proponents believe. But nothing in the FairTax proposal prevents Congress from raising the rate to 30%, or even higher. Given the government's proclivity for spending money, an eventual increase in the FairTax rate, were the measure to pass, seems inevitable.


External Links



References

  1. ↑ Americans For Fair Taxation, “About the FairTax,” http://www.fairtax.org/site/PageServer?pagename=about_main
  2. ↑ "Embedded Taxes Change Fair Tax Analysis",http://www.roanoke.com/editorials/commentary/wb/wb/xp-51569
  3. ↑ http://www.factcheck.org/taxes/unspinning_the_fairtax.html
  4. ↑ http://pubdb3.census.gov/macro/032007/pov/new04_100_01.htm
  5. ↑ American For Fair Taxation, http://www.fairtax.org/site/PageServer?pagename=about_main
  6. ↑ Just how fair is the ‘Fair Tax’ CNN Money, September 2005, http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/
  7. ↑ http://www.fairtax.org/site/PageServer?pagename=about_fairtax_four#neutral
  8. ↑ Just how fair is the ‘FairTax’ CNN Money, September 2005, http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/
  9. ↑ Americans For Fair Taxation http://boortz.com/nuze/200510/10132005.html
  10. ↑ “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
  11. ↑ Greenspan: "Consumption Tax COuld Help Economy",http://www.foxnews.com/story/0,2933,149298,00.html
  12. ↑ “The FairTax: A Trogan Horse For America,” Jews For Preservation of Firearms Ownership, http://www.jpfo.org/fairtax.htm#fn1
  13. ↑ “Linder Reintroduces FairTax Legislation”, http://www.johnlinder.com/News_Details.asp?NewsID=128
  14. ↑ “Linder Reintroduces FairTax Legislation”, http://www.johnlinder.com/News_Details.asp?NewsID=128
  15. ↑ FairTax Gains Support, http://www.fairtaxblog.com/20070508/record-sixty-co-sponsors-for-fairtax-bill-hr-25/
  16. ↑ Massachusetts For Mike Huckabee, http://massachusettsforhuckabee.blogspot.com/search/label/Tax%20Plan
  17. ↑ ”FairTax Supporters Vent Frustration”, June 2007, http://www.theindychannel.com/news/13651607/detail.html
  18. ↑ ”FairTaxer's continue to “flex their muscles”, July 2007, http://www.fairtax.org/site/PageServer?pagename=news_feature
  19. ↑ Greenspan: Consumption Tax could Help Economy, Fox News, March 2005, http://www.foxnews.com/story/0,2933,149298,00.html
  20. ↑ 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
  21. ↑ “Giuliani Jeered For Opposing Flat Tax”, Associated Press, July 2007, http://www.forbes.com/feeds/ap/2007/07/07/ap3891710.html
  22. ↑ “Giuliani Jeered For Opposing Flat Tax”, Associated Press, July 2007, http://www.forbes.com/feeds/ap/2007/07/07/ap3891710.html
  23. ↑ http://www.conservapedia.com/Excise
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