Wednesday, October 7, 2009

The FairTax Primer

Since it's been a while since my last post on the subject, and I've had several new people show up to digest my Blogger-y goodness, I figure it would be best to kick off my posts on the FairTax with a review of the basic facts. Any information I have comes from the official site of Americans for Fair Taxation:

The Problem

First of all, I know of no one who thinks our current national method of torture known as the tax system is anywhere near what we should have. It's unintelligible to accountants and tax attorneys due to its complexity, contradictory legalese, and sheer bulk. It shifts and changes in the political wind on the whim of the party in power. It's used to manipulate individuals and businesses, while also paying off others with magical tax breaks. It's administered by a vast government bureaucracy, which requires vast bureaucracies in companies to make sure they don't have the government bureaucracy crawling into their company's ass. And no one really knows how much they pay in taxes, because half the taxes are hidden in the items we buy.

To address this, a myriad of things have been suggested, from simple bullshit tweaks that resolve nothing but the results of the next election, to major overhauls like the flat tax, to value added taxes and sales taxes. And while any major tax overhaul would be an improvement, I've found one clear and logical solution.

What is the FairTax plan? (from the site, because I don't want to miss anything)

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.

Nuts and Bolts of the FairTax

The tax rate: 23% inclusive tax, to compare with the current income tax system. Instead of $25-35 per $100 of income going to the government, it's $23 per $100 of purchases.

The Prebate: This is a check sent to every household to offset the amount of FairTax up to the federal poverty level. This means that no one who is buying the basic necessities is taxed. It also means that the tax is voluntary, based on your monthly expenditures.

Government spending and Transparency: The only tax you or anyone pays is the FairTax at the register. All embedded taxes (taxes added to the cost of everything you buy, because we pay corporate taxes and associated costs) are gone. And while the FairTax does not tackle the spending problem, what it does do is provide the same amount of income to the government as our system does now (revenue neutrality), as well as making it EASY to see how much money the government is pulling in.

Your paycheck
: If you are paid $10/hour now, and work 40 hours, your gross pay is $400. 30% of that goes for income tax, medicare, social security. This leaves you with $280 (not counting other deductions). And it doesn't include the $50 or so your employer has to pay as matching for medicare and social security, as well, the associated costs to keep the W-4 info, send the taxes in, and crank out a W2 each year.

After the FairTax, you work 40 hours for $10/hour. Your paycheck (before other deductions) is $400. Then when you spend that $400, $92 is collected and sent onto the government.

The Power to Tax: Government loses all controls on taxes, except for controlling the FairTax rate (23%) and the amount of prebate (by adjusting the poverty level income). The rest of the power resides in the individual to make their choices on how the spend money.

The 16th Amendment (which gave the government power to tax income): Repealed. This is one requirement that goes hand in hand with stripping the power of taxing income from people who have abused it like a Roman Polanski rape victim.

The IRS: Disbanded. After all, the 50 states are collecting the tax.

Tax season: What tax season?

One extra Benefit: While not a part of the design of the FairTax, the switch to the system would remove an ungodly amount of burden from manufacturers, retailers, and companies across the spectrum. It would free up assloads of resources that were otherwise spent complying with taxes. And when companies who were on the edge due to a recession get a sudden influx of freed money, they can stabilize. And companies who were ok to good before are suddenly flush with money. And a lot of that can go to meet increased consumer demand (due to more money available in their paycheck. The current term (misused in Washington) for this is STIMULUS!!!

Questions? Comments? Stuff that requires another post?


TRUTH 101 said...

Do businesses also pay the fair tax on purchases or just individuals?

Anonymous said...

It sounds perfectly rational to me Patrick, I'm sold. I'm sure there will be someone that will come along and tell you the error of this plan, but it won't be me!

Patrick M said...

101: The simple answer would be no. However, the more complex answer would be this: businesses don't pay taxes. They turn taxes into expenses, and add the expense to the price of the item. This is called an embedded tax.

What the FairTax does is consolidate all these hidden taxes into one rate that you can see on your receipt. So businesses, who previously passed on the taxes and their associated costs, do not have to deal with the shell game of taxes. This means more opportunities for productivity, expansion, and more jobs.

Jenn: If you're on board, then spread the word! The more people that can talk about this, the closer we are to passing it.

TRUTH 101 said...

I'm probably wearing out your hit counter today Patrick but I needed to keep coming back to read the fair tax proposal.

According to my rough calculations my family would be paying app. 3 grand a year more under the fair tax. I'm including in what I pay now all sales tax. Property tax and Social Security.

I figured the 23% sales tax you cited in addition to state sales tax because I have no reason to think states and localities will give that up which made the fair sales tax rate 32%. At least where I live.

If I'm figuring wrong let me know. I don't want to argue if my nombers are bogus. I'm all for relieving businesses that create jobs tax burden. As I am relieving them of the burden of employee health insurance which a single payer plan like I've advocated would do. (Had to get that in there.)

Beth said...

What are you going to do with all the idle tax accountants and tax lawyers?

TAO said...

If businesses do not pay taxes then just incorporate yourself and your family and you can live tax free!

An LLC or S Corp for every family!

dmarks said...

Why not? So many businesses incorporate as LLC/etc that would not otherwise, in order to get more protection from the possibility of frivolous lawsuits.

Patrick M said...

101: Did you use the FairTax calculator, or your own calculations?

On there, when I first ran my numbers, I was breaking even. Now, even with the assumptions adjusted down, I'm making out better. If you want to go over specific numbers, we can work it out over email (in lieu of you putting your personal info out here). I might actually put some numbers based on averages just to show the results.

And another advantage of the FairTax (since you brought up you pet cause) is that it would make it easier to finance things like Mediscare, Social inSecurity, and your dreadful single-government-payer system.

Beth: They'll have to find meaningful work. Luckily, they're intelligent and detail-oriented people.

Tao: Here's the long answer.

The short answer is that you have state tax collections being able to easily look at the relatively small number of businesses (as compared to the number of individuals) and find those who are trying to evade their taxes (because that would be against the law).

Dmarks: Are you agreeing with or mocking Tao? I'm not really sure, thus the lack of commentage. :)

Toad734 said...

Not this shit again.

Satyavati devi dasi said...

I still think the black market, which is alive and well on a good day, would burgeon into a huge underground system.

Tax evasion is an American tradition, going back to telling King George to stuff it. It's practically a hobby for some people, and the more money you make, the better you are at it.

Every system that can be abused, will be abused, and if the government is putting all its revenue eggs in one basket, any rocking of the nest will have potentially dire consequences.

You may feel that it won't be much and the government can keep up on it, but people are unbelievably creative when motivated and huge black markets exist now that operate perfectly successfully. People will find ways to undermine and get around something like this, and the government won't have anything else to fall back on.

TRUTH 101 said...

I know what you mean Sati but scumbags and cheats will always be among us. You gotta move on.

TRUTH 101 said...

It has me $320 less with the "fair tax." Is that with still paying state and local sales taxes though? And local property taxes also?

Need more info. I'll look at that site instead of wearing you out Patrick.

Patrick M said...

Toad: Yes, until it passes and we're free of government oppression and manipulative theft.

Saty: I refer you back to my answer to Tao. In short, enforcement becomes easier because there are 50 states motivated to collect money, and fewer targets. Will it get rid of cheats, no. But it will become much harder.

101: I won't wear out. But I'm not going to be able to cover everything in a couple of posts. The FairTax site is much more comprehensive.

And yes, you'll still have to pay state and local taxes. those don't change. Just the federal tax burden.