The Fair Tax: Is the End of Income Tax On Its Way?

by SMD 

The Fair Tax movement is something that is gaining steam across the nation, as more and more individuals learn of the new possibilities that might soon exist in lieu of paying income tax. The FairTax movement is making its way across the nation in a way that one might expect a politician to. It seeks to get people to understand that a federal income tax is not the only way to pay.

What is the FairTax movement?

The proposal is one that seeks to get rid of the current federal income tax and payroll tax system and replace it with a fairer, more practical system. It won’t serve to eliminate all taxes, though. Instead of the federal income tax and associated payroll taxes, Americans will pay a tax based upon what they purchase. In effect, this is a proposed national sales tax. It is a tax movement that includes much more than that, though. This movement will attempt to affect changes to the constitution, and in particular, the 16th Amendment.

This movement will eliminate federal income taxes of all forms, including both corporate and personal taxes. Among the things that will not be taxed under the new law include gifts, estate earnings, investment or capital gains, Social Security income, and self-employment taxes. The FairTax movement takes into account that taxes must be levied in order to run the nation, so it proposes a simple tax on all sales. The sales tax would be significantly higher than our current sales tax, as it would likely be somewhere in the 25-30% range.
If a new tax law were to be put into place, it would be carried out by the entities that currently handle sales tax. This would help to eliminate any logistical problems that might exist otherwise. With that in mind, it is one of the simplest implementations possible.

What are proponents saying?

The Fair Tax movement has gained a lot of steam and in that, it has picked up some staunch supporters. Those who support the new tax act have some interesting arguments in favor of the proposal. The majority of that information can be found at the official website of the FairTax movement .

In their staunch support of the new taxation, supporters like to bring up the inefficiency of the old system. According to statistics, the total amount of money wasted by businesses and individuals was $200 billion last year. With this new tax, that waste could be saved and the productivity of the American economy would be on the rise. This means that everyone wins under the new system, where they might have failed under the old system.

In addition to improving the overall efficiency of the tax system, this new tax would take some of the burden off of those who are currently carrying the economy. Under the current income tax code, the people who are paying the bulk of the national tax revenue are middle class citizens who are trying to cut down on their spending. The new tax code would shift the tax burden to those people who are actually doing the spending. Supporters of the Fair Tax movement feel that this is a much more fair system.

What are the detractors saying?

As with most political issues, there is another side of the coin and a large group of people who oppose the FairTax movement. These people are busy shooting holes in the theory of the supporters of the movement, and have found some support in their arguments against. According to detractors, the entire premise behind the fairness of the proposal is inaccurate. Instead of providing a fairer option to the American people, it actually makes things more difficult.
Those in opposition of the act claim that it is an attempt by the government to once again pander to the upper crust of American society. While the current tax system mandates exactly how much money people have to pay in taxes, this system would allow those rich people to control their taxation. They claim that there are holes in the new sales tax that would enable people to get around the sales tax by using some simple loop holes. Under this line of thinking, the FairTax movement wouldn’t be fair at all.

According to detractors, the problem is that wealthy people do not have to spend a large portion of their income. They can put that money in the bank and let it grow without taxation. This will all occur which the lower and middle class in America has to spend almost all of their income, which means that almost all of their income is taxed. Critics of the new movement claim that this is not fair and it is simply an attempt to limit how much of the wealthy people’s money can be collected by the government.

The FairTax movement has its high points and it certainly has its inherent disadvantages. Though it provides a new, exciting option for Americans to consider, some argue that it will do more evil than it will good. It is far from a perfect system, even though many of the staunchest supporters claim that it will fix all of the ills of the current tax system. As this movement continues to pick up more steam and more supporters, the debate will continue to rage on, as individuals consider how a new tax system might affect them and affect the American people on the whole.

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6 Responses to “The Fair Tax: Is the End of Income Tax On Its Way?”

  1. ryan on December 17th, 2007 1:25 pm

    the detractors saying that rich people do not have to spend most of their income and middle class people do, is BS.

    middle class who live outside of their means will pay more tax. keep it close to the vest and you will pay less. that goes for rich or middle class. people who live outside of their means SHOULD be taxed more anyways, for being dumb.

    this country coddles to losers all day long giving welfare to people to not work. If the bums were taxed more for being bums, maybe things would change.

    i would say to take the fair tax further than Huckabee is purporting, and support Ron Paul. More things need to be drasticly changed than the tax system.

  2. Enough Wealth on December 17th, 2007 7:18 pm

    It will never be adopted. Most people spend all, if not more, than they earn, so they would be end up being taxed at a flat 25%! The closest that is likely to actually be implemented would probably be similar to the federal GST we adopted in Australia, where there’s a flat 10% tax on all spending on goods and services. Even then there were a lot of concessions made in order to gather enough public support to get in passed into law. Unprocessed foods are exempt, as well as some other “basics” of life. This was so that low-income families that didn’t pay any income tax weren’t too badly effected (the slight effect was offset by boosting some other welfare payments to compensate). Then again, we don’t have any state-based sales taxes, so it was an easier sell to get it accepted.

    It also leads to an increase in the “black economy” where people barter or buy-and-sell “cash in hand” without keeping the required records or paying the GST.

  3. Ian from Ann Arbor on December 24th, 2007 3:16 am

    Economist Dale Jorgensen, Harvard University, was commissioned to find out what portion of current prices were represented by costs for complying with the federal income tax code (i.e., embedded tax costs). He concluded that 22% (average) of every retail dollar, spent by consumers, constituted a price-embedded tax. Thus, in addition to individual income tax and FICA withholding, individuals are unwittingly paying these unseen, embedded business tax costs with every purchase of a new product, or service.

    Under FairTax ( ), prices would fall due to removal of embedded business tax-related costs. Concurrently, wages may rise due to a mix of factors, including reversion of withheld pay (or some portion thereof) to employees, advancement opportunities due to business expansion resulting from retained earnings, and/or increased demand for labor accompanying increased competition (from that expansion). Where profits (or wages) appear lucrative, competition will move into the market space, driving out excesses (immediately present after FairTax is enacted), arriving at new “market-adjusted” prices.

    For FairTax to constitute 23% of the transaction cost (i.e., “market-adjusted” price plus FairTax), a mark-up of 29.9% on the new “market-adjusted” price is necessary. (Before balking, consider what we’re paying NOW after converting income tax rates to sales tax rates on NET income instead of gross income. The following figures can be compared to the 29.9% FairTax mark-up: Fifteen pct bracket = 17.6%, twenty-five pct bracket = 33.3%, twenty-eight pct bracket = 38.9%, and thirty-five pct bracket = 53.8% of what’s left over after the tax is deducted from gross pay.)

    In order to make FairTax a PROGRESSIVE consumption tax (such as that called for, recently, by Warren Buffett), all legal-citizen families are simply sent a “monthly consumption [tax] allowance,” called a “prebate.” This prebate is intended to reimburse taxes on necessities without need for record-keeping or reporting. Moreover, the direct payment bypasses the creation of a tax code specifying exempted products and services around which a lobbyist industry could grow. The amount is variable, based on family size, and is equal to the FairTax rate on poverty-level spending, as defined by the Dept. of Commerce. At present, a family of one would receive ~$200/month, a family of four, ~$500/month. Thus, the “effective” FairTax rate paid by citizens, will *never* equal the full 23%. Of course, U.S. visitors (legal, and illegal) will pay the full FairTax when they purchase anything new, at retail (used are not taxed again). Under FairTax, working families will have their whole paychecks (minus any state or local income tax withholding) plus their monthly family prebate.

    Additionally, citizens will no longer have to spend the average 50 hours per year preparing their federal tax returns. Having more monthly income may result in using credit less, and saving more. Larger savings will make it easier to purchase a home, at a lower interest rate and monthly payment. (Thus, mortgage deductions are no longer applicable when income is not the basis for taxation).

    But is FairTax “fairer”? To provide substantive answers, Prof.’s Kotlikoff and Rapson (10/06) have concluded ( ),

    “…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

    “Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”

    Further, per Jokischa and Kotlikoff (2005) ( ),

    “…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

    The current income-based tax system is also more expensive to run, because of the manner in which the tax code is gamed by politicians and lobbyists. Politicians realize great power, and attract constituencies for support, by granting tax favors (i.e., credits, deductions, exemptions) through lobbyists. Fully, fifty-three percent (that’s 53%!) of Washington lobbyists are there because of the tax code! The tax code is continually changing, making it more complex and more difficult to understand. And, the salaries and costs of tax lawyers and lobbyists end up in the prices of the products and services we buy. Additionally, the time and money required to keep records, file returns, report for audits, retain accounting and legal help, pay IRS penalties and interest, is time and money lost for other productive, or recreational, activities. Depriving us of the use of withheld wages increases our expenses through zero-interest withholding, inflation, return preparation time, and interest paid on credit cards and loans that otherwise may not have been necessary. Summed up, the cost of tax compliance, nationally, has been estimated to range anywhere from $265 billion to twice that amount, depending on the extent to which tax-avoidance consultation is sought and utilized. These expenses constitute a substantial “hidden tax” which is incomprehensible to the average working American. And the FairTax gets rid of all of it for most Americans, and most of it for business owners.

    It is our belief that government should serve We, the People, with a fair tax system that will not enable politicians to pit poor against rich (creating barriers to achieve wealth, adding tax penalty to the sacrifices made for personal success). Nor do we want politicians to continue using business as a tool to hide taxes from consumers, often villifying business, which discourages entrepreneuship, personal achievement, economic growth. Liberty and happiness depends on restoring the fruits of labor to those who produce them. We believe that the tax function should align with economic growth, not against it, that government should be paid for in the same manner as working Americans – when, and because, something is sold.

    As things stand at present, Americans labor under nothing less than “tax slavery,” having our wages confiscated every working hour, as reflected in our paychecks every two weeks.

    Many of us have joined ( ) in order to build a national movement to free ourselves, our family pocketbooks, and our businesses from confiscation of income, and punishment of productivity. And this we say to our federal representatives, “Either scrap the code ( ) and enact the FairTax, or we intend on replacing you with someone who will.”

    (Permission is granted to reproduce in whole or part. – Ian)

  4. Money, Finance and Fancy: The Carnival of Personal Finance #132, Whimsical Christmas Edition on December 24th, 2007 9:54 am

    [...] The Fair Tax: Is the End of Income Tax On Its Way? @ Smart Money Daily: The Fair Tax movement seeks to get people to understand that a federal income tax is not the only way to pay. The proposal is one that seeks to get rid of the current federal income tax and payroll tax system and replace it with a fairer, more practical system. ~ooOoo~ [...]

  5. The Honest Dollar | Carnival of Personal Finance #132 at The Digerati Life on January 31st, 2008 3:43 pm

    [...] “The Fair Tax: Is the End of Income Tax On Its Way?” from Smart Money Daily.  I like this article because I don’t know too much about the Fair Tax proposal, and the article provides a balanced look at what supporters and detractors of the Fair Tax are saying. [...]

  6. Henry on December 25th, 2010 3:06 pm

    With Fair Tax, there are problems. According to Fair Tax Act-2005, these are the taxes that will be eliminated if Fair Tax is enacted: Federal income tax, payroll tax, corporate tax, capital gains tax, self employment tax, gift tax and inheritance tax. Fair Tax will NOT eliminate the gas tax (Fed. or state). Fair Tax will be added on. Gas will be taxed 3 times. Fair Tax will NOT elinimate any state sales tax. Fair Tax will be added on. Fair Tax will NOT eliminate any state income tax. Still have to file before April 15th. No IRS? According to Fair Tax Act-2005, there shall be in the Department of the Treasury a Sales Tax Bureau plus 2 departments. (IRS under another name). Repeal of 16th ammendment? It takes a separate act of Congress to do that. 2/3 vote of each House of Congress, 3/4 rartification of the States. Fair Tax taxes food, clothes, rent, utilities, buying a new car, buying a house, medical, doctor visits, auto repairs. Fair Tax will hurt new car sales. Cars will be taxed (Fair Tax and any state sales tax). It will stores and businesses on the U.S. side of the border with Canada and Mexico. There is a website: Fair Tax vs. Income Tax-Robert Longley: He tells who are the winners and losers of Fair Tax. WINNERS: People who incline can avoided consuming, people who can shop in other countries, people who own businesses: sales tax will only be charged on goods bought by individuals and not by firms.( The wealthy can buy new cars but register the vehicles in their firm’s name, the wealthest 1%. LOSERS: Seniors, poor, middle class, families with incomes less than $200,000 a year. Also read There is no such thing as a Fair Tax-Laurence The truth about the Fair Tax and the people behind it. The Prebates? 1 person-$208 a month, couple-$415 a month. It goes up with children, not much. Who is the head of Fair Texas billionaire Leo Linbeck is the founder and head of Fair Makes you wonder.

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