Fair TaxIt's about time Let me say at the outset …… I don’t know what the best tax structure for America is. I do know that our present tax system is confusing, burdensome, and discourages productivity. Before we discuses potential advantages of the fair tax. Lets address the two groups who will be hurt with a new fair tax system.
With that said let us review some information on what a fair tax is and is not.
Fairness and Federal Tax Reform The notion of fairness in a tax system means many things to many people. The Webster's Dictionary defines "fairness" as "just and honest, impartial, unprejudiced," which connotes an abstract sense of equity. The average taxpayer, however, sees fairness as much less abstract. Small businesses see fairness as the equitable distribution of compliance costs, or as similarly situated businesses being similarly treated. To those who must plan for the future, fairness means stability or consistency in the tax code. To individuals, fairness means that the tax structure imposes costs based on ability to pay, or that the system is enforced evenhandedly. By any standard of fairness we wish to apply, the FairTax is superior to the present tax system.
The FairTax is simpler. As a starting point towards understanding the advantages of the FairTax over the income tax, we can contrast the complexities of our current system, with the simplicity of the Americans For Fair Taxation (FairTax.org) plan. This plan envisions the replacement of personal, gift, estate, capital gains, alternative minimum, earned income, Social Security/Medicare, self-employment, and corporate income taxes with a single-rate, federal sales tax-levied solely under the bright lights of the retail counter-on all new goods and services. The plan also intends to set a rate that is revenue neutral, neither raising nor lowering the overall tax burden in the US economy. The simplicity of a tax system affects fairness in several respects. A fundamental notion of fairness is that citizens should be able to comprehend the laws that affect them. However, current tax law is beyond the comprehension of most taxpayers, including many of those who devote their entire professional lives to it. Today, we hold taxpayers accountable for knowing and complying with an intricate web of more than 7,000 individual Internal Revenue Code Sections, 10,000 pages of text, hundreds of thousands of pages of regulations and other pronouncements, and an equally weighty verbiage of court opinions interpreting the law. This complexity translates into frustration, unnecessary cost, wasted time, and needlessly lost productivity. The complexity of the tax code disproportionately affects smaller businesses that do not have the time or the resources to delve into its mysteries. When taxpayers fail to adhere to the complexities of the law—often through innocent mistakes—they are punished with penalties, interest, and a great deal of frustration. The complexity of current tax law disproportionately rewards those who can afford to aggressively pursue tax planning. The well advised often view tax planning as a game that they can afford to play, using sophisticated tax planning devices, the cost of which is justified by the resulting tax savings. Skillful manipulation of the tax code can lead to huge gains in competitiveness, or to substantial increases in individual wealth. The ongoing manipulation of the tax code for financial gain can be seen in estate planning, in trust planning for children's education, in pension coverage, and in many other facets of tax planning. In contrast, the FairTax is a highly visible tax system that cannot be avoided by sophisticated devices. Under the FairTax only one question is typically relevant: how much did the consumer spend on the purchase of a final good or service? The complexity of the current system adds to unfairness in at least one more respect. By necessity under the current system, different industries, different sizes of firms, and different taxpayers will be treated differently, adding unfair distortions to the economy. In summary, the complexities that exist in the form of thousands of critical distinctions under the current income tax system place an unfair, costly burden on most taxpayers and create unfair, cost-saving advantages for those taxpayers who can afford to aggressively exploit the system to their advantage. The income tax disproportionately injures the upwardly mobile. The income tax is unfair because it taxes the principal means by which Americans can improve the standard of living for themselves and for their children. The income tax is biased against those who are seeking to improve their families' lot in life through savings, investment, and hard work, while it favors those with assets to consume. The FairTax improves the standard of living of the vast majority of Americans by rewarding an individual's decision to work, save and invest. Under current law, however, consumption of goods and services is favored over savings and investment. A taxpayer often enjoys no immediate benefit from savings and investing, and the fact that the taxpayer has already been taxed on his or her income means that there is also no incentive not to consume. The income tax system rewards the here and now, and penalizes taxpayers who seek to save for the future by taxing income when it is earned and also when it grows. Under the FairTax, those who benefit from tax-sheltered income, as well as those who profit handsomely from the complexities and confusion of the tax system, no longer benefit from advantages that are not available to most taxpayers. The FairTax additionally benefits lower income families through increased economic growth. Slow economic growth or recessions have a disproportionately adverse impact on the poor. Breadwinners in these families are more likely to lose their jobs, are less likely to have the resources to weather bad economic times and are more in need of the initial employment opportunities that a dynamic, growing economy provides. The FairTax dramatically improves economic growth and improves wage rates, while retaining the present tax system would needlessly delay economic progress. Fairer measures of the “ability to pay” are the basis of the FairTax. The FairTax plan is fairer because, much more than an income tax, it is based on "ability to pay." Under an income tax, taxing income at graduated rates has been the means for achieving progressivity in taxation. A tax on income, however, no matter how steeply graduated, does not necessarily make an income tax progressive over the course of one's lifetime.[1] The ability to pay is not properly defined solely by how much income someone happens to make in any given period, such as a year. On the contrary, income is merely the means by which productive members of society try to increase their personal wealth so that they have better economic security, can provide better for their family, and have the ability to pay for things they wish to purchase. Often wealth—which in and of itself may not be a fair determination of the ability to pay—is not captured by an income tax. Individuals rich in personal wealth may actually have very little income, because wealth is defined in assets that they hold—their homes, properties, securities, collectibles and other items—which may or may not have been earned by them and which may or may not generate taxable income streams. These wealthy individuals can often choose whether or not to create taxable income, since they can restructure their affairs to avoid receiving current taxable income. The FairTax, far more than an income tax, is based upon a taxpayer's ability to pay precisely because it is based upon consumption. Whether or not a taxpayer can consume for personal enjoyment is a more accurate litmus test for whether or not that taxpayer has the ability to pay. When taxpayers do not consume for personal enjoyment, but have income, they must be saving or investing those resources. When taxpayers save and invest, they contribute to the public welfare. They generate benefits to the community, for their future and their children's future, well beyond personal gratification. The income tax disproportionately injures low-to-middle income and fixed-income Americans. In addition, to compliance cost burdens, the income tax is already invisibly embedded in the price of the goods we consume. In addition to the payments we make directly to the government, we pay additional hidden income taxes that are incorporated into every product or service we buy. We just do not see them. Almost everything we purchase has already been taxed once and often numerous times, with the concomitant cost of compliance at each such step. When we purchase bread for our sustenance, we are paying a price to recover the income tax and compliance costs imposed on the farmer who produced the wheat, the silo that stored the wheat, the trucker who transported it to the miller, the miller that milled the wheat, the baker that baked the dough, and on the retail outlets that brought the final product to your grocery shelf. Therefore, an accurate appraisal of the burden of the income tax must examine the hidden taxes paid on consumable items. The income tax system literally cloaks the cascading nature of the tax, its true economic effects, and its real burdens on the purchase price of the final goods andservices. This is an insidious burden on our working poor and retirees living on fixed income. The FairTax is progressive. The distribution of the FairTax proposal is fairer than present tax law because the FairTax onlytaxes consumption above the poverty line, assuring every family the ability to spend, tax-free, for their basic needs. In this way, the FairTax, unlike the current system, exempts from taxation the basic necessities of life. This is accomplished by providing a rebate to each family equal to the taxes paid on the purchase of essential goods and services as determined by the HHS Poverty Level. The rebate would be paid monthly in advance-a prebate-to every family. The monthly family allowance for 2004 can be found in Table 1. TABLE 1
The FairTax would also replace the payroll tax. The payroll tax is imposed on the first dollar of wages earned, and therefore has a disproportionate impact on lower wage earners. In contrast, the FairTax exempts all expenditures up to poverty level through a rebate system. Additionally, unlike the Social Security component of the payroll tax, which is only imposed on the first approximately $90,000 of wages, the FairTax would be imposed on all consumption over the poverty level, and would tax the consumption of affluent taxpayers. This ends the narrow, regressing funding of Social Security through payroll deductions and replaces it with a broad, progressive sales tax paid by all retail consumers. The FairTax would eliminate the graduated income tax rate structure that penalizes people as they strive to earn more for their families. Because of the rebate system, however, highconsumption families would pay higher average tax rates. For example, because their first $22,500 was not taxed, a family of four spending $45,000 would pay an effective rate of only 11½ percent tax on their taxable purchases. A family that spent four times the poverty level ($90,000) would pay an average tax rate of 17¼ percent. The graph found in Table 2 shows the effective tax rates that a family of four with various consumption levels pays under the FairTax, compared directly with what they pay under the current system.
TABLE 2Effective Tax Rate Family of Four (married couple, two children)
Table 2: This table represents the effective sales tax rate of a family of four at various levels of annual expenditure or consumption, directly compared with what they pay under the current system. At an annual expenditure level of about $22,500, the effective FairTax rate is zero; at an annual expenditure level of $100,000, the effective tax rate for a family of four is approaching 20 percent. The FairTax eliminates excessive compliance costs borne by the private sector and disproportionately by small business and the middle class. The question of whether or not a tax system is fair must also take into consideration the incidence of compliance costs. Presently, it is conservatively estimated that pproximately $250 billion is spent per year complying with the federal income tax system.[4] Compliance costs amount to an estimated 29 percent of the total revenue raised by the income tax system, and about three percent of the gross domestic product (GDP). Relative to asset size, small corporations—America’s job creators—bear a compliance cost burden at least 27.2 times greater than the largest corporation. In 1992, as a group, these small corporations had to pay at a minimum $724 in compliance costs for every $100 they paid in income taxes.[5] These huge compliance costs are a pronounced drag on our standard of living and the international competitiveness of U.S.-based firms. Although duly included in the national income product accounts, the payments made to tax lawyers, accountants, IRS agents and other tax professionals do not improve our collective standard of living. Conversely, productive jobs are driven out of our country. Under an income tax system, these compliance costs are disproportionately borne by small businesses and therefore the middle class, the principle owners of small businesses. These job losses are disproportionately borne by their employees, especially low-income Americans. The FairTax reduces tax compliance costs substantially. In fact, the Tax Foundation has estimated that compliance costs would fall from $225 billion under the present tax system to about $8 billion. This amounts to a 96-percent reduction in compliance costs; this saving is the equivalent to a free year of strong economic growth.[6] These compliance cost savings will inure to the middle-class and to entrepreneurs (the owners and operators of the majority of small business), with a direct, positive bearing on employment. The FairTax also compensates businesses for their compliance costs by providing a fee to businesses that collect and remit sales taxes. State sales tax organizations collecting the FairTax enjoy similar reimbursement. The FairTax is visible to all—the very best impediment to special-interest lobbying efforts. The FairTax plan is also fairer because it is more visible. One of the greatest attributes of a sales tax regime—an attribute that enhances compliance and assures fairness for all—is its resolute clarity. The FairTax allows—indeed one might say, forces—each and every taxpayer to take notice of the actual burden of government in every purchase that taxpayer makes, from teenagers purchasing music to affluent retirees purchasing a new car. In this way, the FairTax is notably distinguished from an income tax and virtually every other form of tax. If is very difficult for a lobbyist to cover his tracks when every taxpayers knows the tax base; it is very difficult for Congress to raise the rate when every taxpayer knows the rate. The transparency of the FairTax adds to the reality and perception of fairness and compliance in one final respect: the tax paid by others is easily seen. When one purchases a good or service for personal consumption, it is clear at the retail level that each taxpayer is pulling his or her load for the tax system. Currently, the IRS estimates that the "tax gap"—unpaid taxes—amounts to about $200 billion per year under current law. If this is what the IRS will admit to, one might suspect the actual amount may be higher. This gap will never be fully closed, but it is more likely to be considerably reduced under the FairTax, because the FairTax concept is understandable and viewed as fair and legitimate by most Americans. What is the FairTax? The FairTax is non-partisan legislation (HR 25/S 1493) that abolishes personal, gift, estate, capital gains, alternative minimum, earned income, Social Security/Medicare, self-employment, an corporate income taxes and replaces them all with one simple, visible, federal retail sales tax. The FairTax dramatically changes the basis for taxation by eliminating the root of the problem: Taxing income. The FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral, so it is also price neutral. The final cost for goods and services changes little under the FairTax. The FairTax is a fair, efficient, and intelligent solution to the frustration and inequity of our current tax system. Who is Americans For Fair Taxation (FairTax.org)? FairTax.org is a non-profit, non-partisan, grassroots organization dedicated to replacing the current tax system. The organization has hundreds of thousands of members and volunteers nationwide. Its plan supports sound economic research, education of citizens and community leaders, and grassroots mobilization efforts. For more information visit the web page: www.fairtax.org or call 1-800-FAIRTAX.
[1] "Examining a Change to a National Retail Sales Tax Regime: Impact on Households," Joseph Kahn, Decisions and Ethics Center, Stanford University, unpublished draft position paper, November 1996. [2] Federal Register: February 15, 2000 (Volume 65, Number 31, Pages 7555–7557). [4] "Compliance Cost of Alternative Tax Systems II," House Ways & Means Committee Testimony, Arthur P. Hall, the Tax Foundation, March 1996. [5] Ibid. [6] Among business compliance cost savings: there would be no more alternative minimum tax, no more multiple depreciation schedules, no more complex international tax provisions, no more complex pension and deferred compensation rules and no more uniform capitalization rules. Because individuals who are not engaged in business would no longer file tax returns, the number of tax returns filed may fall as much as 80 percent. Businesses would experience a dramatic decline in compliance costs as well. i This table shows the monthly rebate for families living in the 48 contiguous states; Alaska and Hawaii have different poverty levels and thus different rebates. Please go to the FairTax FAQs at www.fairtax.org for the data on these two states. The family allowance is based on family size and is determined by the government's Poverty Level. All lawful residents of the U.S. holding valid Social Security numbers are eligible for the rebate. Monthly rebates are sent out in advance of purchases—a prebate—to ensure that no taxpayer pays taxes on essential goods and services. ii Federal Register: Feb. 13, 2004 (Vol. 69, No. 30, pp. 7336-7338)
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