Pondering the Fair Tax – updated (see last paragraph)

Arguably one of the biggest headaches for the citizens of this country is the current tax structure. For example, many Americans have no idea how much of their money is seized by the federal government before they receive their paychecks, which leads to
reduced accountability of politicians to their increasingly detached and apathetic constituents.

A proposed solution to the debacle that is the current tax structure (and the IRS) is the Fair Tax plan, which when passed and signed into law will repeal the individual income tax, the alternative minimum tax, corporate and business taxes, capital gains taxes, Social Security taxes, Medicare taxes (and other payroll taxes), the self-employment tax, estate taxes, and gift taxes. In place of these taxes, a simple single-rate personal consumption tax – a sales tax – on new goods and services will be instituted. Note that this is not a government reform proposal, but merely an easier and more equal way for the federal government to collect taxes. To make a long explanation short, read The Fair Tax Book by Neal Boortz and John Linder. They explain it better than I can here.

Embedded in all of the goods and services we spend money on now is about a 22 percent tax – out of every $1 you spend on a loaf of bread or milk or a car, $.22 makes its way to the federal government. Under the fair tax, those embedded taxes would disappear, thus reducing costs to consumers. Prices would fall equivalent to that 22 percent as companies would scramble to gain market share (think of simple economic principles). The proposed Fair Tax rate is 23 percent (though it could very well be lower), which would put costs about the same as they are now. Not really a big change, right?

This, combined with workers seeing their full paychecks, would put more money into the consumers’ pockets, thus boosting the economy. More people would save and invest (no more tax on interest earned), which also helps the economy. Also, American businesses that have been driven off shore because of the current tax burden would come back to the U.S., bringing more jobs and more money. This proposed tax would also equalize those who don’t currently pay taxes – I’m talking about the players in the underground and illegal industries (drug dealers, prostitutes) as well as the very rich who find loopholes in the current tax system. Afterall, everyone has to buy things, right? Much of the American wealth in off-shore financial institutions would also come home because of the easier tax burden.

You might be asking about the less fortunate people – doesn’t the fair tax unfairly target them? Well first, they don’t pay taxes now (in fact, much of our tax “pays” them). But second, an important part of the Fair Tax is the “prebate” idea. These would be monthly checks from the government equal to the amount of tax we would be expected to pay on life’s basic necessities. Everyone would receive this, from the poor to the rich. That way, the less fortunate can see their full paychecks, not pay tax on necessities, and be able to save more easily than they do now.

There are many other questions that people have about the Fair Tax, which can be found in the book I mentioned above (get it and read it), or on FairTax.org. Most of my questions have been answered already (including questions about the housing industry and what about retailers who want to cheat the system). The truth is that it is not a perfect plan – none are – but it is a lot better than the system currently in place. A question that I do have that has not been answered yet is how long it would take after implementation for the market to take over and prices to drop. Wouldn’t the waiting period be detrimental to the economy? What about goods and services that might not be in high demand or might not have that much competition – wouldn’t their prices take longer to come down, thus costing much more than they do now? If you have answers to those questions, please feel free to help me out. I’m not a critic of the Fair Tax but a supporter who just wants to learn more.

Many of the Presidential candidates are supportive of the Fair Tax, including Ron Paul and Mike Huckabee. Instituting the Fair Tax would be a big step to turning this country around. Visit FairTax.org to learn lots more than what I could put here, or pick up The Fair Tax Book (it’s short and cheap). After researching for yourself, contact your Congressman to get him/her to support it, too.

*Update:
After thinking about it more, and hearing concerns from others, I’m not so sure I am convinced yet until I get some more answers. Churches (and other non-profit organizations I think) have been exempt from paying federal taxes since the beginning of the country. What would happen to them if they all of a sudden had a tax burden? A church wishing to expand or plant a church or fulfill a dream of building a new church would be faced with a burden they have never had to face before?

Also, what about state taxes? The federal tax rate of 23 percent would even out prices after the embedded tax disappears, but with the addition of a state tax, or combined with current state taxes (states are funded largely on non-income tax funds), the tax burden would be about the same, or worse than they are now. Does anyone have answers for that? Let me know, I would like to be more informed.

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