Fair Tax Pros and Cons
April 16th, 2007
In a follow-up to yesterday’s post about the Fair Tax debate, here is a summary of what I have been able to determine are the major pros and cons of the Fair Tax (or national sales tax) as it is currently written:
Pros:
1. Federal income taxes would be completely abolished. According to Fairtax.org, this would include all ancillary taxes on personal income such as estate, gift, capital gains, alternative minimum, self-employment, Social Security, Medicare, and payroll taxes.
2. With the repeal of federal income taxes, the IRS (Internal Revenue Service or Income Robbery Service, depending on one’s perspective) would have much less power to snoop into the personal and private financial lives of American individuals. Ideally, the IRS would simply cease to exist.
3. The Fair Tax would be “progressive” in the sense that it would avoid taxing financially challenged (i.e., poor) people for basic necessities. This is accomplished by means of a “prebate”, which according to Fairtax.org would be $2,348 per year for a single person or $6,297 per year for a family of four.
4. The Fair Tax is calculated to be “revenue neutral”, meaning that all current government services would continue to be fully funded because the money that is raised from this national sales tax would be equal to the amount of revenue that is lost due to the repeal of federal income taxes. Programs such as Social Security, Medicare, etc. would be unaffected.
5. Because this tax system is consumption-based rather than income-based, people could exercise a certain amount of control over how much tax they pay. Since the tax is only applied to new (not used, secondhand, etc.) items at the point of sale, a relatively frugal person could avoid paying taxes on most things, and might even make money because of the “prebate”. Meanwhile, wealthy people who choose to live “high on the hog” without paying attention to their spending choices would probably pay more tax.
6. Since the Fair Tax only taxes consumption, it would not punish businesses for expanding and creating more jobs, investing in research and development, or donating to charity. Also, the individuals who create and maintain those businesses would have more disposable income to expand and compete in international markets (assuming that they make relatively wise choices, see the point above).
7. The base price of goods and services (that is, their cost of production before adding any taxes, profits, etc.) would be lower because the embedded costs of the current income tax system would no longer be a factor. This would partially offset the increase in the total price of new products and services that would result from the Fair Tax.
8. From the standpoint of government revenue collection, the “problem” of tax evasion would be reduced because people who currently resist paying income taxes and/or derive their income from black market sources would be taxed automatically at the point of sale whenever they purchase new goods and services. Moreover, the government would no longer need to spend taxpayer money in order to chase down income tax evaders.
9. A national sales tax such as this would be much more transparent than the current tax system. There would be no more loopholes, special exemptions, payroll taxes, embedded costs, or other factors that allow people under the current system to avoid realizing how much tax they are actually paying. With the amount of taxation clearly visible to the general public, people (hopefully) would be less likely to tolerate wasteful spending, corruption, and inefficiency in government, resulting in lower levels of taxation and a stronger economy overall.
Cons:
1. The retail price of new goods and services would increase.
2. If the income tax is not fully repealed as promised OR a future president and/or Congress decides to re-instate some portion of the income tax code under the guise of a “national emergency” or something similar, we could end up with a national sales tax AND an income tax, which would be disastrous for our economic freedom.
3. The actual rate of the national sales tax would be 30%, not 23% as the Fair Tax proponents claim. This difference is due to the deceptive language that the proponents use to describe the tax rate calculation. Not only is this deception insulting, but it also makes it easier for the government to raise the tax rate in the future because people will think that the current rate is lower than it actually is.
4. Unlike the income tax brackets, this national sales tax proposal is not indexed for inflation, meaning that as inflation increases the base price of goods and services, the amount of sales tax that you pay will also increase.
5. People who have paid into the Social Security system and/or private savings accounts for retirement will be effectively double taxed when they begin withdrawing their money and spending it. This is because most of the money that people have managed to save up to this point already has been taxed under the current system.
6. Because tax rates would be simplified under the national sales tax system, this could ironically make it easier for the government to raise the tax rate on certain items that it deems “unhealthy” or “dangerous”. If this occurs, things such as fatty foods, cigarettes, firearms, and an indeterminate number of other politically unpopular items could wind up being taxed at exorbitant rates, which would certainly go against the spirit of a “fair” tax system.
7. If the Fair Tax is sufficiently high (like 30% or more), this could encourage more people to enter the black market in order to avoid the tax. This could cause crime that is often associated with black markets to escalate and effectively criminalize otherwise ordinary people.
8. The “prebate” that is built into the Fair Tax system could actually do more harm than good in the long run because it would effectively put all Americans (except those without Social Security numbers) on the government dole, and this could create problems with dependency and the “free lunch” mentality as experienced by recipients of current government welfare programs.
9. The Fair Tax does nothing to solve the underlying cause of high taxation, which is excessive government spending. As long as the federal government keeps spending taxpayer dollars on things that it has no business being involved with in the first place, it will continue to require high taxes in order to finance its expenditures, including the increasing cost of the national debt. Simply changing the method of taxation is not going to change the root causes of unfair taxes.
Your firet con about the cost of goods increasing fails to incorporate the fact that the “hidden” taxes on retail items has been eliminated.
Retail goods today include corporate taexes, salaries of tax lawyers and accountants, the employer portion of the social security tax is also added to the cost of retail goods with the current system. And thes taxes that are added to the retail goods is a cascading tax that goes all the way back to the raw materials of the retail goods, the manufacturing of all the components. These “hidden” taxes only apply to products made in the USA not in foreign countries so foreign products are cheaper due to not having any US taxes imposed. If we had the “fair tax” then our manufactured products would be cheaper or at least the same to produce as the “made in china” products.
Therefore stop misleading people with your false statements about the increase in products and services. You just don’t get it.
I think ‘Highly Intelligent” needs to read the entire article. He/she makes a point that current retail costs incorporate hidden taxes. Certainly, if these hidden taxes were eliminated, the retail cost of our products would be significantly lower.
Indeed, the original author of the article states, “The base price of goods and services (that is, their cost of production before adding any taxes, profits, etc.) would be lower because the embedded costs of the current income tax system would no longer be a factor.”
However, you must advance to the next step - production costs are projected to be lower, but then the “fair tax” (an accumulation of all current hidden taxes) must be added to arrive at the final retail price. This translates into higher retail costs. The benefit? we’d know what we’re paying and could have some control over the amount we pay.
The book (FairTax: The Truth: Answering the Critics) devotes most of its pages to answering the many criticisms often raised about the FairTax proposal. With few exceptions, it thoroughly addresses all nine of the “cons” listed in this post. As with any plan the size of the FairTax proposal there are bound to be problems and things that require closer scrutiny, but this sort of dialog does not forward the debate in any meaningful way. As it is, considerable sums of money have been spent in the employ of scores of respected economists in both academia and the business world to do a very impressive amount of peer-reviewed research that the FairTax is based on. Disputing the conclusions drawn from this research, and offering alternative thesis’s in an intellectually honest way is where we need to take this debate. Compiling a list of supposed shortcomings and offering nothing but unsupported personal opinion simply falls short of the sort of discussion we should be having about this important idea.
I do not propose to be any sort of scholar or authority on either the current tax system or the fair tax plan, however, I do know that the current system favors the “haves” and punishes the “havenots”. For example. Did you know that only the first $97000 of your income is subject to “income taxes”? Any amount above $97000 is taxed at a lower tax rate. Currently 15%. It is, at its core, overly convoluted and antiquated. So much so, that even those that are considered professionals in the tax field cannot make heads or tails of much of the tax code. That being the case, how is the “average Joe” supposed to understand and make it work to his advantage? In my opinion, almost anything would be better than what we have now. And the Fair Tax makes about as much sense as anything I have heard of to this point. I pay about $250.00 per week in payroll taxes. Thats $13000 per year. Add that to the $2348 from the “prebate”, and I would have an extra $15348 per year of spendable income. I think that money would be better managed in my hands rather than the governments hands given their ridiculous track record.
Something else to think about for those that think the Fair Tax would not generate enough revenue to maintain the current programs. i.e. medicare, social security…etc. All the drug dealers, pimps, prostitutes, street hustlers, bootleggers and the like, none of which pay into the current tax system, would instantly be paying the same rate as the hardest working person you know. Now, if that is not “Fair”, I do not know what is.
RedRon
I think you’re all a bunch of retards.
If someone chooses to live here, then he/she needs to contribute. If you want the benefits, then you can pay for them, too. Everyone buys “things,” so, everyone will pay tax. No more hiding or evading the law. Consider illegal immigrants and lazies who don’t pay taxes.
I am often in agreement with the idea of a fair tax and I was with “Anonymous” on the expectations of huge tax revenue generated from illegal activities but I was much suprised when I read that “The Internal Revenue Service estimates that over two-thirds of underground income comes from legitimate wages, salaries, profits, interest, and pensions that simply aren’t reported…The volume of such mundane transactions greatly exceeds the underground income generated by drug dealers, prostitutes, or illegal gambling.” This includes lawnmowing, manual labor and other sorts so only about a third of the blame, and I’m not siding with scum, should be directed at criminals.
Schiller, Bradley R.. The Macro Economy Today. 11th. New York: McGraw- Hill/Irwin, 2008.91
I have listened to the points of the fair tax for several months now, and am in the process of reading the book. So far, and based on what we have now, this fair tax proposal would open up our economy to the world’s capital. We would be the new “tax haven” around the world and would not have needed a “bailout” for our latest woes (Thanks to the politicians). Can you imagine having control over OUR own money now? To some people, that may seem scary since it appears we have been heading towards a Roman Style Patronage system for years. Why do we allow the Government to TAKE our money, waste our money (Obama thinks 18 Billion of waste is minuscule), and cheer when they decide to send a portion of it back to us? We need to take the current Tax Code away from the politicians so they can’t use it as a Carrot or a Stick to sway votes. Each State should compete for our residency with the same incentives by being more responsible with the taxes they do receive. More inhabitants would create more tax revenues for the infrastructure improvements. It is so simple of a plan that the current politicians will never endorse it.
who care’s?
How do we support our military, build roads, bridges, maintain our sewage systems? Who pays the salaries of the government employees?
@chorti7:
This particular proposal is supposed to be “revenue neutral”, which means that it is designed to generate the same amount of funding that the current tax system does. Therefore, things like military, infrastructure, etc. will continue to be funded just as they are now. As for government employees, frankly we could use fewer of those anyway, but that is probably a topic for another article.
I think it is funny that the proponents assume the cost of the goods leading to the final user will decrease. We live in a free market an the sellers will get as much as they can, whether they are paying “tax attorneys and accountants” or not. The price will be determined by what they think and can get, regardless of the costs and related expenses.
Another thing, do you really think that the government is willing to give up this ability to manipulate the behaivior of the masses? Taxes, and the lack thereof, make people do things. Certain deductions/credits encourage home ownership, education, charitable contributions, etc.
Ain’t gonna happen….
For someone who titles themself highly intelligent, they really cannot spell. Use spellcheck next time you care to expound on a topic!
wbgcpa -
Companies will charge “whatever they think we will pay” but when the items don’t move the prices will come down even at a loss.
I don’t think the government is willing to give up the ability to “manipulate the masses.” But what exactly is the problem with taxing things at different rates. If I wanted a gun, or liquor or a twinkie for that matter, I wouldn’t cry about spending a couple extra bucks for them. Conversely we could help the poor immensely and the general public as well by taxing fresh produce and certain packaged goods LESS than other items, thus providing incentives to live a healthier life. We could tax things like cars more and hybrids less and on and on and on.
The only problem would be for utilities since most consumers can’t choose their own, and any tax on the company goes directly to the consumer. Which is why they should be regulated but that’s another story. Of course these “powers” could be used for evil but that’s why we vote right?
In the Cons section number 3 the author states that the real rate would be 30% and not 23%. I read the same information he did and without the liberal blinders and found that statement to be very misleading. What the opponents will tell you is that when the real cost for an item is $100 the retailer will add $30 to the cost making it a $130 item and in effect a 30% tax. Lets say a retailer believes someone will pay $130 for am item. He rings it up for a total price of $130 and then he give 23% of that to Uncle Sam. That would be $29.90 in tax ($30 to round it up). 23% of the price you paid for your item was the tax. The opponents want you to think the proponents and creators of the fair tax are being misleading about it but they stated it exactly as it should have been stated. The only part of this that can be considered Con is that it is money we would have to pay to government. There is where the statement “Freedom isn’t free” fits, even in the monetary sense.
the con about the tax rate being 30% instead of 23% does not really make sence because these taxes will be collected at the check out. so if i buy $100.00 of stuff i will pay $23.00 in tax even if the store buys the products then sells them the cost should not be more then $123.00 because the tax has already been payed and the items become second hand that are not taxed.
to: wbgcpa
You are correct, we do live in a free market society, somewaht. If I sell widgets and you sell widgets and the Fair Tax is implemented each of our costs to make those widgets will go down by the same amount. (the embedded income taxes we used to pay). Now if I am greedy, I will keep my price the same so I can make more money, right? But if I see an opportunity to lower my sales price because my cost went down, I can sell more widgets than you can. But then you will lower your price too in order not to lose market share. Oh, so that means through competition, the price of widgets will decline proportionately and adding back the sales tax means there is virtually no change in the end cost to the consumer! Oh yea, and you and I as widget sellers are still making about the same gross profit margin but selling more widgets because our customers have more money in their pocket!
No, computer, you are the retard. Now, seriously is that the best comment you can think of. I guess so. You obviously don’t have anything intelligent to say. So, I don’t know why you even bothered posting any thing. So, why don’t you come back when you have something intelligent to say, that is if you have a brain.
I agree with computer! In every blog I’ve read on this, everyone fails to reduce the initial cost of the item. If you reduce a $100 item by 23% you get $77. If you take 30% of $77 you get $23.10. Add the two add you get $100.10! This is 7th grade math for God’s sake! There is a big uproar about the poor! If they work, their tax goes away and they break even. For the welfare group, just raise their check by 23% instead of a “prebate”. Yes, 23% of 100% is equivalent to 30% of 77%. About the IRS, Someone needs to over see the retailers and the black markets. Shift the responsibilities to the IRS. There are areas where we may get hurt. The stockmarket hit I took is far greater than any double tax hit would be. I am all for it. Just don’t baffle it with BS.
Thank all of you,
KAL
I have just finished reading the book The Fair Tax and it addresses all 9 of your cons of a fair tax system. It’s much easier and transparent than our current tax structure and it eliminates anyone from not paying taxes and fairly. The prebate actually takes care of the problems of people on lower income and this system encourages people to do a better job of climbing the ladder of success and at worse case sceanrio encourages people to live within their means and thereby eliminating poverty. It causes billions of increased revenue to the Federal Government just from illegal money earned and spent at the point of sale for which very little is currently being collected, never mind what would be saved by getting rid of the IRS. Basically from a business perspective, you’re eliminating the middle man (the gov.) from choosing their own price to pass on to the consumer (us) in the form of taxes. There is general conception that our law makers are trying to what’s best for us as needed, and instead what they are actually doing is planning what they decide we need and what we should be able to afford to pay for it with no regard for our opinion. Congress is out of control mostly because most of it’s members have been there so long, they either never have been in business or they’ve forgotten or just don’t give a damn.
FAIR TAX is the only way to prevent the communists from controling each and every american.They will not be able to control you.Also people will save lots of money from buying and selling used items like cars et.c.
Hey, we pay sales tax in CA now plus hundreds of other taxes
The eliminating only of the property tax is worth voting for the Fair Tax. With only one tax will be realy easy to control where the money is spent by the government.
poopy!
what about state taxes. much of our property taxes support our school system. does the fair tax eliminate the state and property tax?
This was a great article. Unfortunately, the Fair Tax constitutes a major shift in control from us..to the people. That is something that we will not tolerate. We are smarter than you, and we know what’s best for you. Yes we know that you vote. Big deal. We just tell you what you want to hear and then do the opposite. That’s called ’standard operating procedure’. We are really good at it. We have been in office so long that it’s become second nature. Oh, and don’t bother trying to get our term limits shortened, we just won’t vote on it. That’s how we roll, and what are you gonna do about it?
the problem is it’s entirely consumption driven. look at the economic downturns we’ve suffered the last decade. our economic system is flawed in that it needs consumption to grow to keep from imploding.
I fear a consumption led tax would result in the cyclical imploding of a tax system badly needed for national defense and various other infrastructure needs for the health and well being of all americans.
Also I believe the wealthy will find a way out of paying the consumption tax by buying non-american goods. And the lazy folks that don’t want to work will just live on the prebate and buy on the black market. Which would leave the working class to carry the burden.
you suck corey
@wwfk:
My understanding is that the FairTax is supposed to be a replacement for federal income taxes, which are the taxes imposed on us at the national level. State taxes would be unaffected.
These folks are nuts I tell ya…
http://www.house.mo.gov/news.aspx?id=250
you are also forgetting to include that by eliminating the department of the IRS that deals with income taxes it would free up 50-80 million dollars of revenue. plus anyone who buys anything who is not from this country, drug dealer, pimp, or prostitute who in the past had no taxable income would now pay income tax just like the rest of us hard working Americans. The best advantage though would be with all the embedded taxes taken off the cost of producing goods in America it would make it roughly the same price as making the same item overseas ( if you calculate in the cost of shipping.) so companies could than bring those jobs back home. this is predicted to put an extra 500 - 800 million dollars in to the economy within 5 - 10 years. I suppose I don’t have to say i support the fair tax plan. people are always going to complain about taxes i just think this makes the most sense, no loopholes
This sound like Brian’s Tax from the mid 1980s in Canada. A Sales Tax was to be the savior of the people of Canada, now they have the GST or the Gouge and Screw Tax as well as income tax.
Jerry
Now that’s what I’m talkin about Jerry. Trick these silly folks into what they think is going to be a “Fair Tax”, then in the middle of night, re-enact to old system on one of those ear mark thingies. That gives me goose bumps just thinking about it. We’ve managed to give our pitbull of an IRS the power to arrest, seize property, and find guilty anyone it pleases without a trial. Could you imagine what it would be like if we could manage to get everyone coming AND going?
One problem with the fair tax I have never seen addressed is multiple taxation.
My husband is a self employed contractor. He buys most of the material he uses for his customers projects at retail stores, like Home Depot and Lowes. He could not get them at contractor only outlet, since they do not exist. So he pays the tax at check out, like you do, when he buys the material for a job, passing the cost on to the customer and has to charge them the fair tax for the entire cost of the new fence, deck, etc he has just built for them, including the material he has already paid the tax on and charged them for.
Most home builders get alot of their material from retail outlets. How do they not pay the tax. To solve problems like this I see simplicity going out the window for business.
I’ll say, this discussion is more interesting to me with every new spending bill that is passed. I’ve been trying to get my arms around the entirety of the Fair Tax, and I gotta say, the more I get into it, the more it looks like our current system. I suppose the problem is that anything “fair” will never fly with our government, so as a result, we will always have to settle for “concessions” in order to get any meaningful legislation passed. Now as I write that I see that I am mistaken. We need a mandate the size of the one our current congress believes it has.
“One problem with the fair tax I have never seen addressed is multiple taxation.
My husband is a self employed contractor. He buys most of the material he uses for his customers projects at retail stores, like Home Depot and Lowes. He could not get them at contractor only outlet, since they do not exist. So he pays the tax at check out, like you do, when he buys the material for a job, passing the cost on to the customer and has to charge them the fair tax for the entire cost of the new fence, deck, etc he has just built for them, including the material he has already paid the tax on and charged them for.
Most home builders get alot of their material from retail outlets. How do they not pay the tax. To solve problems like this I see simplicity going out the window for business.”
It is ok for contractors to pass on the taxes they had to pay for materials, as long as its in the contract. Your husband will still be paying the tax on his personal items. No one is exempt.
Hey all,
Ok, I think the fairtax would suck and everyone will hate it……AT FIRST! For about 1-3 months the companies prices will stay the same and when that first company slashes prices and the others follow suite then we will be paying about the same for our goods and services like the book says. To the lady whose husband is a self employed contractor and is concerned about the fair tax….he will be saving so much money under the fair tax. Self employed americans pay more in taxes than people that work for another company. No more savings accounts just for taxes and quarterly trips to the accountants to pay into our failing system. When he buys his supplies at Homedepot or Lowes he has already paid his taxes. DONE. Cashiers are a lot cheaper than H and R block any day! Your husband will get the same amount per job as he does now or more because he isn’t putting away 25-30 % into a bank to give to Comrade Obama. Understand it is you and your husbands bread and butter, but ma’am, with all due respect. Do your homework. You and him will be 100% better off.
To jimbob:
You used improper grammar when accosting the author over his incorrect spelling. Your comment, “For someone who titles themself highly …” should be, “For someone who titles himself highly …”.
RAF
Why not simply eliminate the Federal Income Tax and reign in government spending??? This give the power of the purse back to the people to make financial decisions (charities, savings, education ect.) and not the government. This would be more akin to the founders tax plan. That makes more sense to me. For more information please watch this video…..http://video.google.com/videoplay?docid=-1656880303867390173
RedRon
You are mistaken on the comment about the first 97,000 being taxed a t a higher rate. Did you mean your fisrt 102,000 is included in the medicare/SS tax then everything abouve that is free and clear of that particular tax? Google Tax Rate go to the first selection in the search. Gives a good look at our tax structure.
Flat Tax is the best way..
a very important aspect that the fair tax that is not talked much about is that the cost to all america of the K Street lobbyist. Companies that hire and pay these lobbyist millions of dollars write this off with their corporate accounts advising theme. In effect, we the people are paying for the special interest, to keep our politicians corrupted and that is why many do not support the fair tax. Their elected office they serve we are all in a hidden way paying for. in the meantime our polical system keeps getting more and more corrupt. Like Will Rogers said many years ago that the US TAX CODE WILL EVENTUALLY TURN OUR NATION INTO A NATION OF LIARS AND CHEATS. A NATION OF LIARS AND CHEATS EVENTUALLY CANNOT STAND. The fair tax is the answer. We need to keep up the good fight and remind our frends and famaillies that our nation is at stake here.
I have paid taxes on the money I have saved. With the Fair Tax I will pay taxes again when I spend it. That does not seem fair to me. I think a better idea is to remove all deductions from our current tax system.
Fair Tax is plainly visible to the public.
This is replacing a tax system that is largely covert.
All people will look at their store receipts and understand the cost of gov’t.
This TRANSPARENCY will produce the biggest results.
The above listed “cons” are minor or not completely thought through. Two cons that are valid are:
(1) older Americans whose savings has already been taxed (as income), will be taxed again when they spend. There are many ways to mitigate for this.
(2) transition will be difficult. With current economic crisis, should phase in in 2010, begining with 2% in Jan10, rising by 2% each month to 23% in Dec08 and thereafter. This will jump-start the economy as everyone runs out to make major purchases (cars, homes, etc ….) will go through the roof. If economy heats up too much, accelerate the phase-in.