I have been meaning to talk to you about the FairTax. I know you have heard me mention it before. Well tonight I am going to highlight the many benefits of the Fair Tax. Why tonight? Well this week the FairTax book by Rep. John Linder and talk show host Neal Boortz was released.
I am going to be up front with you. I am not the best source of information on this subject. In fact I am going to cheat by copying and pasting a lot of information from better sources. My hope is to introduce you to the FairTax, share information about why it is such a good idea, and hopefully get you to look into it more as well as encourage your elected representatives to pass it. I will be providing links to more in depth and better sources of information somewhere near the end of this post.
I suppose the place to begin is with what is the FairTax. Here is one of those copy'n'paste moments I mentioned:
The FairTax plan is a comprehensive proposal that replaces all federal income and payroll taxes with an integrated approach including a progressive national retail sales tax, a rebate to ensure no American pays federal taxes up to the poverty level, dollar-for-dollar revenue neutrality, and the repeal of the 16th Amendment. This non-partisan legislation (HR 25/S 25) abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes and replaces them all with one simple, visible, federal retail sales tax collected by existing state sales tax authorities. 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 cost neutral the final cost for goods and services changes little under the FairTax. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
In a nutshell the FairTax will do the following:
- It takes all of our current federal tax laws and throws them away
- It replaces them with a federal retail sales tax
- This sales tax will bring in at least the same amount of tax revenue as the current tax code
Simple isn't it. I want to talk about the concept of a sales tax in general. I live in Florida. Florida does not have a state income tax. This means when I receive my paycheck I receive my full paycheck after Federal Taxes are withdrawn. Florida does have a sales tax. When I buy an item 7% is added to the price. This means the only tax I pay is when I spend money. It is not taxed when I save it. It is not taxed when I invest it. I only pay tax when I spend money on items subject to the sales tax. That is a wonderful thing. I want you to take a look at your latest pay stub. I want you to find your gross pay. Then I want you to take a look at the taxes being withheld. Add those up and think about what you could do with that total. Now look at the net pay. Wouldnt it be nice if your gross pay was your net pay? Under the FairTax it would be.
That brings us to the question of how much of sales tax are we talking about. The answer is 23%. Sounds a bit high doesn't it? It isn't actually. In the price of every item you buy taxes are added on. It is a cost of doing business. This needs to be stressed. Corporations do not pay taxes they merely collect them. They price their goods and services to account for taxes levied against them. Studies calculate that approximately 23% of the price of any item is simply taxes. Under the FairTax all of those taxes are eliminated. This means that everything becomes about 23% cheaper to make. I am sure that some of you cynics are thinking that the companies will simply pocket the money. The fact is that markets do not work that way. Let us look at a recent example. Perhaps you remember GM announcing their employee discount sale. This was the sale where theygave the average person the same discount they give their employees. Do you remember what happened next? Several other car manufacturers announced similar sales. It was so successful it forced GM to extend their original sale. This is what happens ina competitive market. Let us apply it with the FairTax. Say I sell widgets for $100. Twenty-three dollars of that $100 sale tag is the taxes I have to pay to produce the Widget. The government implements the FairTax. Suddenly that Widget could be soldfor $77. Now I admit I would probably think about just pocketing the profit I just received. Granted my customers will pay $123 for my widget but hey do it is a government tax. Besides they have more money now that they are not having Federal Taxes withheld. Except Bob throws a cog in my plan. See Bob sells widget like items that he calls Cogs. Bob sees Im not lowering my prices and realizes that if he lowered his price more people would buy his Cogs. Well if I sell less I make less money. So I lower my price, he lowers his price, and so on till we get down to the same profit margin we start with which would be around $77. Now of course you have to add in the sales tax. That moves the price of the Widget back up to $100, which is what you were paying in the first place.
Now I am pretty sure that somebody who likes math is going to point out that while $23 is 23% of $100 it is only 17% of $77. They would say the tax rate would have to be about 30% to make up that $23 dollars. Apparently this is a matter of semantics with taxes. Basically when you talk about taxes it is either inclusive or exclusive. Typically you talk about income taxes in an inclusive manner or like this: I paid 23 percent last year. For every $100 earned, $23 went to Uncle Sam. Or, I had to make $130 to have $100 to spend. Thats a 23-percent tax-inclusiverate. Sales taxes are talked about in an exclusive manner like this: I bought a $77 shirt and had to pay that same $23 in sales tax.". That is a 30% tax rate. Either way you look at it, $23 is going to the government. When discussing the FairTax the inclusive rate of 23% is usedbecause it is trying to replace the federal tax that is included in the price of every item sold. Perhaps the most important thing to remember here is that under the income tax you do not have a choice in how much tax you pay. Under the FairTax you choose how much you pay by choosing what you buy.
The FairTax will probably lower the cost of items by more than just the 23% being removed. Keep in mind that companies spend a lot of money in order to comply with our tax code. Under the FairTax they will no longer have to. If they do not have to spend the money on that compliance they will be passing the savings on to you. The FairTax may also increase your pay beyond allowing you to keep what is withheld today. When you are hired there are more costs involved beyond what you are being paid. Specifically your boss matches the social security tax that is being withheld. That is money he could be paying you if he did not have to pay it to the government. What is going to make him pay it to you after the FairTax goes into effect? In fact you might even wonder what is going to prevent the boss from lowering your pay rate since you do not have to have taxes withheld. Pretty much the same thing that will keep prices the same - competition. His competitor will now be able to offer you more money now. If your boss wants to keep you or be able to hire others he is going to have to be able to pay more and he will be able to because he isnt paying those taxes.
Now I know some of you are going to be concerned about how much the rich will pay and how much the poor will pay. Let us start with the rich. They will pay more than most. The rich enjoy buying expensive toys. It is a natural thing. The more money a person has the more they will spend. Under the FairTax the more they spend the more tax they will pay. They will not have loopholes to get out of paying the taxes either. The only way they can avoid paying taxes is to not buy things. Do you really think that is going to happen?
What about the poor? Under our current tax system the poor do not pay direct income tax (it is withheld but they can get it all back in the next year) . They pay payroll taxes. They also pay the 23% tax included in the price of item. Under the FairTax the poor would not pay any taxes up to the poverty line. How is this possible you ask? The FairTax plan includes a monthly tax rebate (you like getting your refund check every year imagine getting one every month). What the government will do is calculate the amount of sales tax you and your family is likely to pay for necessities (such as food, clothes, medicine, etc) and send you a check at the beginning of the month for that amount. Under the FairTax the poor benefit the most because they are no longer paying hidden corporate taxes. They get all of their money from their paycheck. They receive money to cover the taxes they are going to pay on necessities. They do not have to pay for tax preparation to get money back. They do not pay taxes on savings and investments. Let us compare this to our current tax system. Tax money is withheld every paycheck. They might get it all back after spending several hours filling out forms and probably paying someone to help them. They pay for the taxes levied on corporations. They pay taxes on savings and investment. Explain to me exactly how they benefit under our current system?
Something you may have been wondering is what happens to Social Security and Medicare under the FairTax. They are still there and collected. Remember it isnt the goal of the FairTax to change anything about our current government except how they collect taxes. Social Security/Medicare will still be funded. Instead of collecting from a regressive income tax the funds will collected from the sales tax. The amount you will get back from these programs will be calculated based upon the number of hours you work as reported by your employer. Like these programs or not they will not change under the FairTax.
Hopefully by now I have convinced you (with less copy'n'paste than I thought I would use) this is something you need to look into. I have only covered the basics about the FairTax. There are a number of benefits I have not touched, such as:
- We become attractive to companies when they consider where to call home. If our tax code makes it cheaper to be here than somewhere else they will come.
- It eliminates competitive advantages for foreign companies
- Everyone pays. Do you live here or are you just visiting either way you pay taxes. Here legally or illegally youll be paying taxes.
- Significant benefits for the agricultural and ranching industries
- How seniors benefit under the FairTax
- Increased Privacy
I encourage you to look further into why we need the FairTax. Here is where you can do that:
Americans for Fair Taxation (www.FairTax.org) Home of all things FairTax. Including all the supporting evidence for the FairTax
FairTax FAQ - easy to understand answers concerning most questions surrounding the FairTax
The FairTax Book - All you want to know about the FairTax but were afraid to ask. When is the last time a tax book was #1 on the New York Times bestseller list. It is an easy to read book making the case for the FairTax. It is now available in paperback with more information than the original hard back edition
H.R. 25 The FairTax Act of 2005 - the text of the FairTax bill as presented in the House of Representatives
S. 25 The FairTax Act - the text of the FairTax bill presented in the Senate
FairTax Video - an introduction to the FairTax
Rep. John Linders FairTax Site - site from the author of the bill
Maybe I've already done a really good job and convinced you to support the FairTax and you are wondering what you can do to get it passed. Well first check the FairTax scorecard and see if your Congress people are supporting the FairTax. If any of them are not then you need to write letters, fax letters, email, and phone them. Let them know they could lose your vote and the votes of people you influence if they do not support the FairTax. Second you need to help spread the word about the FairTax. This is a true grass roots effort. Buy a couple copies of the FairTax book and send it to people you know. Perhaps leave a copy or two to be found. Make sure your library has it, if it doesnt donate a copy. If you have an online presence, put up a prominent link. Post about it in forums and chat rooms. FairTax.org has a number of resources available to help spread the word.
I hope you are not thinking that the FairTax cannot happen. History will prove you wrong. Our country has changed in many ways since its founding. Blacks were freed, given the vote, and equality. Women were given the vote. Civil rights were passed. The founding of our country was because of unfair taxation (and at the time their tax burden was considerably less). At the time it was inconceivable that a group of colonies could throw out a monarchy and replace it with government selected by the people. Many Eastern European countries are now free-market economies when they were once under the boot of communism. All of these started as grass root movements that brought about great change and good in the world. Our current tax code was a change as well. We did not always have the system that we do today. I know it seems that way but I bet you can still find some oldfolks who remember when we did not have a national income tax. One of the gifts our founding fathers gave us was the ability to have a voice in how we are governed. We have used that voice in the past to effect change. We can use that voice now. It isn't easy but it can be done by uniting together and working together to make that voice heard.
Here is the last word about the FairTax. Our current tax code is a punitive, restrictive, regressive, costly, opaque system that is strangling our country. It is riddled with loopholes that only benefit those who spent a lot of money to have them put in. It is used to restrict our freedom and ability to build our wealth to live in lifestyles we would like to become accustomed to. It takes power from We the People and puts it in the hands of our government. Our Founding Fathers did not want this for us. The FairTax is a progressive tax that replaces our current system with an easy to understand, transparent, and accountable method of taxation. It does it in a manner that will not take $1 away from the government. It is a system that will grow and generate more revenue as our economy grows. It encourages that growth instead of hindering it. It puts the power where it belongs, - in our hands.