The Fair Tax, What is It and What Would it Change?
Dennis AuBuchon
April 16, 2009
Today the economy is in need of changes and what those changes will be are yet to be decided in many respects. Each action being taken by Congress now and in the future will change the way our economy operates and either fails or succeeds. It is important that decisions being made by our government officials at the state and federal levels be the right ones. Decisions made must be made on sound principles and accurate information. Among the changes being considered is what is called the fair tax act of 2009. For more information about the status of the fair tax proposal action in Congress you can visit www.fairtax.org.
I do not propose to know all the answers to such a system but the current complexity of our tax system needs to be changed. Whether this involves the implementation of the fair tax which amounts to a consumption tax or something else, our economy needs help. There has been much discussion over the years about a fair tax system and this year is no different. There are both negative and positive aspects of a fair tax system. However, many times statements are made but are not supported with the data on which the statement is based.
The current legislation includes HR 25 and Senate S296. The fair tax is a subject that for the most part I believe the public does not understand what it is and what it would change. This article will discuss what is in the present legislation as it is now worded and provide some insight as to what it represents in terms of changing the amount of taxes we now pay. Some say that to create a fair tax system that a constitutional amendment would be necessary to affect the current income tax system ratified through the 16th amendment to the U.S. Constitution. While I am not a constitutional expert on what it takes to abolish an amendment to the Constitution I believe it is not a simple process.
I am not proposing adopting or rejecting this piece of legislation but it is one which must be carefully weighed as to the benefits and negatives. The basic premise is to eliminate income taxes, payroll taxes, estate taxes and gift taxes among others. While this may appear to be a good thing the consequences of taking such action must be carefully weighed. There are currently eight points for accepting a fair tax system and thirteen points to reject it. These are the same on several sites. Below is listed these points and my opinion in general on the positive and negative.
Yes
1. A national sales tax discourages consumption, leading to a conservation of resources.
2. The removal of an income tax encourages saving and investing, which is the key to job growth.
3. Individuals would have an extra incentive to work hard and earn income, leading to a far more productive nation.
4. A sales tax would be a much simpler system, eliminating the need for individuals to comply with complex tax reporting requirements and freeing up all the money & time lost on the income tax process.
5. Tax rates can be targeted to encourage or discourage the consumption of certain items.
6. Consumer prices of certain items would fall since labor and tax compliance costs would be cheaper to businesses.
7. It would allow a greater collection of tax money from those carrying out illegal transactions, since their income is hid from the income tax system but will be taxed when they spend it in a sales tax.
8. It's a tax system consistent with a free society; i.e. Americans have a choice regarding their taxes, unlike our current confiscation system
No
1. A sales tax would be a regressive tax; i.e. low-income individuals would pay a much higher share of their incomes than wealthy individuals.
2. A national sales tax is a risky system that may not raise near enough money to support all our needs in defense, education, health care, etc.
3. Consumer spending, which drives a thriving economy, would likely drop as people save and invest more rather than spend.
4. Many incentives built into our tax system (such as education, home ownership, charity, etc.) would be eliminated.
5. Hundreds of thousands of attorneys, accountants, and human resource workers would likely lose their jobs due to the simpler tax system.
6. Real estate values would likely plummet since the tax advantages to ownership would vanish.
7. Mortgage and other consumer debt would likely explode since consumers would be forced to finance the taxes also.
8. We would have to come up with another way to raise or set aside funds for social security.
9. The transition costs of such a change would be extremely expensive.
10. Tax evasion and instances of black market purchasing would likely skyrocket.
11. Consumer prices of many items would go up by a much greater rate than the sales tax rate since raw materials would also be taxed.
12. Retirees and others who have earned the majority of their life income have already had their money hit with income tax; thus, they will pay extra sales tax with money already subjected to income tax.
13. A sales tax is more insidious; i.e. it's easier for the government to raise taxes without the people knowing it, as opposed to an income tax which shows up on the W2's and 1040's every year.
The list above makes good points on both sides. The positive side of a fair tax system is that it is more simpler and easier to understand. I feel the tax code today is complex and it is sometimes hard to determine what is acceptable and what is not. Even when you call an IRS office and ask the same question to more than one person you most often get a different response. While this may be due to the lack of training or the result of extra help during tax season it points to a complex system where there appears to be different interpretations on the same tax policy. Today we pay the taxes businesses must pay through the price of their goods and services. When the cost of doing business becomes less then prices ultimately fall. Some may say that this may not necessarily occur in a fair tax system but completion would play a part in making this happen. If the same product is available by a company who reduces the price based on his reduced costs and another does not people will look at who is providing the best deal knowing that the costs of doing business has been reduced in a fair tax system.
Today also when we work overtime more money is taken out of that overtime to pay more tax. Under a fair tax system we would be able to keep the extra money we earn and thereby have more money in our pockets. It would encourage more productivity and would provide incentive for earning more money. Today we are penalized when we earn more as our taxes increase as the amount we owe increases as defined by the tax brackets in place. When people have more money as they would under a fair tax system it would encourage more savings thereby providing more resources for banks to lend money to businesses and individuals who need it. It would also provide more available cash for individuals and businesses to purchase more goods and services.
Granted under the fair tax system there probably would be some exceptions on goods that would be exempted from the sales tax. One example of this would be food purchases. Food is a necessity and thereby would be exempted. This would also have a potential impact on reducing food costs as they continually seem to rise.
The negative aspects of the fair tax system also have some valid points. One key point made is the unpredictability of revenue which a fair tax system would generate. This aspect is no different than our present system. Currently there are predictions on everything about the economy and how much revenue the government will receive. Sometimes the revenue is greater than expected and sometimes it is less. The key is to create an environment in which business can flourish. Creating a simple tax system will reduce the cost of business, potentially reduce the cost of products and services and when prices go down consumers typically spend. The fair tax proposal is a consumption tax or sales tax. Most states currently have a sales tax system which would collect the sales taxes from businesses in their respective states. Therefore a national sales tax would not create additional work or increase the cost of government as a process is already in place.
Many of the other negative statements regarding the fair tax system for the most part are opinions as to what may occur regarding the loss of jobs such as accountants, attorneys and human resource jobs. There are always going to be a need for attorneys, accountants and human resource jobs. The creation of a fair tax system will not eliminate all government regulations and in this respect accounts and attorneys are still going to be in demand. With regard to human resource jobs all businesses have a human resource department that manages the hiring and firing of individuals for their business. Some of the language in the present bills do allow for some exceptions of certain products and services. For the most part it appears that necessities such as food would be exempted. The key to any legislation directing actions such as the fair tax is the language created to implement it.
The fair tax proposal language in Congress is not finalized but the status and the details can be tracked through access to the senate and house of representatives web site (www.senate.gov and www.house.gov). Other sites which offer information are www.govtrack.us and www.fairtax.org. Additional information about the fair tax proposal can be found at the end of this article. Links tie to comments, articles and other information related to the present fair tax discussion in Congress. The discussion of the fair tax comes at an appropriate time with our present economic situation. On April 15, 2009 there were many demonstrations linked to taxes that are currently paid. The demonstrations were called Tea Party (Taxed Enough Already). The interest of these demonstrations signals that Americans are becoming increasingly intolerant of spending that is taking place as to how our tax dollars are distributed.
Any tax proposal to reduce the amount of taxes individuals and businesses spend must be heavily considered and the impact of the changes must also be weighed. With any change there will be a period of transition and positive and negative impacts. Creating a simpler tax system whether it is a fair tax or something else is badly needed. Today many Americans dread April 15 each year. Any effort to reduce the cost of doing business and putting more money in the hands of consumers is a good thing. Some money will be saved and some will be spent. Both events provide benefit to the economy. Money saved gives banks more resources to provide loans to consumers and businesses. Money spent increases the business activity and can create jobs which again adds additional funds that can be spent or saved.
Previously I stated in this article when calling the IRS and asking a question the same response may not always be received from more than one individual. This needs to change. Overhauling our present tax system is not an easy task but it needs to be accomplished. Americans need this to happen during this legislative session of Congress. There are going to be exceptions as indicated in the present language of the bills in Congress and these may be subject to interpretation. Current tax preparers may be of use to help understand any new tax system generated. Congressional legislation examples of the past have proven that the language used is not in terms where the average individual will understand them.
The benefits of the fair tax system as identified in the house bill are listed verbatim as follows:
Findings Relating to National Sales Tax- Congress finds further that a broad-based national sales tax on goods and services purchased for final consumption--
(1) is similar in many respects to the sales and use taxes in place in 45 of the 50 States;
(2) will promote savings and investment;
(3) will promote fairness;
(4) will promote economic growth;
(5) will raise the standard of living;
(6) will increase investment;
(7) will enhance productivity and international competitiveness;
(8) will reduce administrative burdens on the American taxpayer;
(9) will improve upward social mobility; and
(10) will respect the privacy interests and civil rights of taxpayers.
The negative impacts of the current system are listed verbatim as follows:
(1) retards economic growth and has reduced the standard of living of the American public;
(2) impedes the international competitiveness of United States industry;
reduces savings and investment in the United States by taxing income multiple times;
(4) slows the capital formation necessary for real wages to steadily increase;
(5) lowers productivity;
(6) imposes unacceptable and unnecessary administrative and compliance costs on individual and business taxpayers;
(7) is unfair and inequitable;
(8) unnecessarily intrudes upon the privacy and civil rights of United States citizens;
(9) hides the true cost of government by embedding taxes in the costs of everything Americans buy;
(10) is not being complied with at satisfactory levels and therefore raises the tax burden on law abiding citizens; and
(11) impedes upward social mobility.
(b) Findings Relating to Federal Payroll Taxes- Congress finds further that the Social Security and Medicare payroll taxes and self-employment taxes--
(1) raise the cost of employment;
(2) destroy jobs and cause unemployment; and
(3) have a disproportionately adverse impact on lower income Americans.
(c) Findings Relating to Federal Estate and Gift Taxes- Congress finds further that the Federal estate and gift taxes--
(1) force family businesses and farms to be sold by the family to pay such taxes;
(2) discourage capital formation and entrepreneurship;
(3) foster the continued dominance of large enterprises over small family-owned companies and farms; and
(4) impose unacceptably high tax planning costs on small businesses and farms.
This article is somewhat long but the topic is a major topic of discussion in connection with the tea parties held on April 15, 2009. The letters represent Taxed Enough Already. Individuals and businesses must have their tax burden reduced and in so doing economic activity will increase and America and the world would be better for it. Reducing the cost of business and putting more money in the hands of individuals ultimately leads to more economic activity which secures jobs and allows our businesses to better compete in the world economy. The information and links I have given provides a means to understand the fair tax system as it is currently defined in Congressional legislation being processed and the comments relating to the negative and positive impacts. I applaud those who have initiated the process of developing legislation to make a fair tax system become law. There are always going to be a need for someone at the federal level to manage and monitor any tax revenues received it is a matter of refocusing the IRS not eliminating them.
I currently see only one problem with developing a fair tax system and that is the 16th amendment to the Constitution. Again I am not a constitutional expert but the language in the 16th amendment states that Congress has the power to lay and collect taxes on income, from whatever source derived without apportionment among the states, and without regard to any census or enumeration. I feel this leaves the door open for the generation of the national sales tax through a fair tax system. In a manner of speaking the more money you make the more you may spend and pay sales taxes. In this respect the collection of sales or consumption taxes to fund the government activities is the source to which the 16th amendment refers.
www.balancedpolitics.org
http://articles.moneycentral.msn.com/Taxes/Advice/IsHuckabeesFairTaxReallyFair.aspx?page=2
http://economics.about.com/cs/taxpolicy/a/
http://geekpolitics.com/10-pros-and-cons-of-the-fair-tax/
http://en.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Constitution
(16th amendment)
http://en.wikipedia.org/wiki/FairTax
(fair tax information)
I do not propose to know all the answers to such a system but the current complexity of our tax system needs to be changed. Whether this involves the implementation of the fair tax which amounts to a consumption tax or something else, our economy needs help. There has been much discussion over the years about a fair tax system and this year is no different. There are both negative and positive aspects of a fair tax system. However, many times statements are made but are not supported with the data on which the statement is based.
The current legislation includes HR 25 and Senate S296. The fair tax is a subject that for the most part I believe the public does not understand what it is and what it would change. This article will discuss what is in the present legislation as it is now worded and provide some insight as to what it represents in terms of changing the amount of taxes we now pay. Some say that to create a fair tax system that a constitutional amendment would be necessary to affect the current income tax system ratified through the 16th amendment to the U.S. Constitution. While I am not a constitutional expert on what it takes to abolish an amendment to the Constitution I believe it is not a simple process.
I am not proposing adopting or rejecting this piece of legislation but it is one which must be carefully weighed as to the benefits and negatives. The basic premise is to eliminate income taxes, payroll taxes, estate taxes and gift taxes among others. While this may appear to be a good thing the consequences of taking such action must be carefully weighed. There are currently eight points for accepting a fair tax system and thirteen points to reject it. These are the same on several sites. Below is listed these points and my opinion in general on the positive and negative.
Yes
1. A national sales tax discourages consumption, leading to a conservation of resources.
2. The removal of an income tax encourages saving and investing, which is the key to job growth.
3. Individuals would have an extra incentive to work hard and earn income, leading to a far more productive nation.
4. A sales tax would be a much simpler system, eliminating the need for individuals to comply with complex tax reporting requirements and freeing up all the money & time lost on the income tax process.
5. Tax rates can be targeted to encourage or discourage the consumption of certain items.
6. Consumer prices of certain items would fall since labor and tax compliance costs would be cheaper to businesses.
7. It would allow a greater collection of tax money from those carrying out illegal transactions, since their income is hid from the income tax system but will be taxed when they spend it in a sales tax.
8. It's a tax system consistent with a free society; i.e. Americans have a choice regarding their taxes, unlike our current confiscation system
No
1. A sales tax would be a regressive tax; i.e. low-income individuals would pay a much higher share of their incomes than wealthy individuals.
2. A national sales tax is a risky system that may not raise near enough money to support all our needs in defense, education, health care, etc.
3. Consumer spending, which drives a thriving economy, would likely drop as people save and invest more rather than spend.
4. Many incentives built into our tax system (such as education, home ownership, charity, etc.) would be eliminated.
5. Hundreds of thousands of attorneys, accountants, and human resource workers would likely lose their jobs due to the simpler tax system.
6. Real estate values would likely plummet since the tax advantages to ownership would vanish.
7. Mortgage and other consumer debt would likely explode since consumers would be forced to finance the taxes also.
8. We would have to come up with another way to raise or set aside funds for social security.
9. The transition costs of such a change would be extremely expensive.
10. Tax evasion and instances of black market purchasing would likely skyrocket.
11. Consumer prices of many items would go up by a much greater rate than the sales tax rate since raw materials would also be taxed.
12. Retirees and others who have earned the majority of their life income have already had their money hit with income tax; thus, they will pay extra sales tax with money already subjected to income tax.
13. A sales tax is more insidious; i.e. it's easier for the government to raise taxes without the people knowing it, as opposed to an income tax which shows up on the W2's and 1040's every year.
The list above makes good points on both sides. The positive side of a fair tax system is that it is more simpler and easier to understand. I feel the tax code today is complex and it is sometimes hard to determine what is acceptable and what is not. Even when you call an IRS office and ask the same question to more than one person you most often get a different response. While this may be due to the lack of training or the result of extra help during tax season it points to a complex system where there appears to be different interpretations on the same tax policy. Today we pay the taxes businesses must pay through the price of their goods and services. When the cost of doing business becomes less then prices ultimately fall. Some may say that this may not necessarily occur in a fair tax system but completion would play a part in making this happen. If the same product is available by a company who reduces the price based on his reduced costs and another does not people will look at who is providing the best deal knowing that the costs of doing business has been reduced in a fair tax system.
Today also when we work overtime more money is taken out of that overtime to pay more tax. Under a fair tax system we would be able to keep the extra money we earn and thereby have more money in our pockets. It would encourage more productivity and would provide incentive for earning more money. Today we are penalized when we earn more as our taxes increase as the amount we owe increases as defined by the tax brackets in place. When people have more money as they would under a fair tax system it would encourage more savings thereby providing more resources for banks to lend money to businesses and individuals who need it. It would also provide more available cash for individuals and businesses to purchase more goods and services.
Granted under the fair tax system there probably would be some exceptions on goods that would be exempted from the sales tax. One example of this would be food purchases. Food is a necessity and thereby would be exempted. This would also have a potential impact on reducing food costs as they continually seem to rise.
The negative aspects of the fair tax system also have some valid points. One key point made is the unpredictability of revenue which a fair tax system would generate. This aspect is no different than our present system. Currently there are predictions on everything about the economy and how much revenue the government will receive. Sometimes the revenue is greater than expected and sometimes it is less. The key is to create an environment in which business can flourish. Creating a simple tax system will reduce the cost of business, potentially reduce the cost of products and services and when prices go down consumers typically spend. The fair tax proposal is a consumption tax or sales tax. Most states currently have a sales tax system which would collect the sales taxes from businesses in their respective states. Therefore a national sales tax would not create additional work or increase the cost of government as a process is already in place.
Many of the other negative statements regarding the fair tax system for the most part are opinions as to what may occur regarding the loss of jobs such as accountants, attorneys and human resource jobs. There are always going to be a need for attorneys, accountants and human resource jobs. The creation of a fair tax system will not eliminate all government regulations and in this respect accounts and attorneys are still going to be in demand. With regard to human resource jobs all businesses have a human resource department that manages the hiring and firing of individuals for their business. Some of the language in the present bills do allow for some exceptions of certain products and services. For the most part it appears that necessities such as food would be exempted. The key to any legislation directing actions such as the fair tax is the language created to implement it.
The fair tax proposal language in Congress is not finalized but the status and the details can be tracked through access to the senate and house of representatives web site (www.senate.gov and www.house.gov). Other sites which offer information are www.govtrack.us and www.fairtax.org. Additional information about the fair tax proposal can be found at the end of this article. Links tie to comments, articles and other information related to the present fair tax discussion in Congress. The discussion of the fair tax comes at an appropriate time with our present economic situation. On April 15, 2009 there were many demonstrations linked to taxes that are currently paid. The demonstrations were called Tea Party (Taxed Enough Already). The interest of these demonstrations signals that Americans are becoming increasingly intolerant of spending that is taking place as to how our tax dollars are distributed.
Any tax proposal to reduce the amount of taxes individuals and businesses spend must be heavily considered and the impact of the changes must also be weighed. With any change there will be a period of transition and positive and negative impacts. Creating a simpler tax system whether it is a fair tax or something else is badly needed. Today many Americans dread April 15 each year. Any effort to reduce the cost of doing business and putting more money in the hands of consumers is a good thing. Some money will be saved and some will be spent. Both events provide benefit to the economy. Money saved gives banks more resources to provide loans to consumers and businesses. Money spent increases the business activity and can create jobs which again adds additional funds that can be spent or saved.
Previously I stated in this article when calling the IRS and asking a question the same response may not always be received from more than one individual. This needs to change. Overhauling our present tax system is not an easy task but it needs to be accomplished. Americans need this to happen during this legislative session of Congress. There are going to be exceptions as indicated in the present language of the bills in Congress and these may be subject to interpretation. Current tax preparers may be of use to help understand any new tax system generated. Congressional legislation examples of the past have proven that the language used is not in terms where the average individual will understand them.
The benefits of the fair tax system as identified in the house bill are listed verbatim as follows:
Findings Relating to National Sales Tax- Congress finds further that a broad-based national sales tax on goods and services purchased for final consumption--
(1) is similar in many respects to the sales and use taxes in place in 45 of the 50 States;
(2) will promote savings and investment;
(3) will promote fairness;
(4) will promote economic growth;
(5) will raise the standard of living;
(6) will increase investment;
(7) will enhance productivity and international competitiveness;
(8) will reduce administrative burdens on the American taxpayer;
(9) will improve upward social mobility; and
(10) will respect the privacy interests and civil rights of taxpayers.
The negative impacts of the current system are listed verbatim as follows:
(1) retards economic growth and has reduced the standard of living of the American public;
(2) impedes the international competitiveness of United States industry;
reduces savings and investment in the United States by taxing income multiple times;
(4) slows the capital formation necessary for real wages to steadily increase;
(5) lowers productivity;
(6) imposes unacceptable and unnecessary administrative and compliance costs on individual and business taxpayers;
(7) is unfair and inequitable;
(8) unnecessarily intrudes upon the privacy and civil rights of United States citizens;
(9) hides the true cost of government by embedding taxes in the costs of everything Americans buy;
(10) is not being complied with at satisfactory levels and therefore raises the tax burden on law abiding citizens; and
(11) impedes upward social mobility.
(b) Findings Relating to Federal Payroll Taxes- Congress finds further that the Social Security and Medicare payroll taxes and self-employment taxes--
(1) raise the cost of employment;
(2) destroy jobs and cause unemployment; and
(3) have a disproportionately adverse impact on lower income Americans.
(c) Findings Relating to Federal Estate and Gift Taxes- Congress finds further that the Federal estate and gift taxes--
(1) force family businesses and farms to be sold by the family to pay such taxes;
(2) discourage capital formation and entrepreneurship;
(3) foster the continued dominance of large enterprises over small family-owned companies and farms; and
(4) impose unacceptably high tax planning costs on small businesses and farms.
This article is somewhat long but the topic is a major topic of discussion in connection with the tea parties held on April 15, 2009. The letters represent Taxed Enough Already. Individuals and businesses must have their tax burden reduced and in so doing economic activity will increase and America and the world would be better for it. Reducing the cost of business and putting more money in the hands of individuals ultimately leads to more economic activity which secures jobs and allows our businesses to better compete in the world economy. The information and links I have given provides a means to understand the fair tax system as it is currently defined in Congressional legislation being processed and the comments relating to the negative and positive impacts. I applaud those who have initiated the process of developing legislation to make a fair tax system become law. There are always going to be a need for someone at the federal level to manage and monitor any tax revenues received it is a matter of refocusing the IRS not eliminating them.
I currently see only one problem with developing a fair tax system and that is the 16th amendment to the Constitution. Again I am not a constitutional expert but the language in the 16th amendment states that Congress has the power to lay and collect taxes on income, from whatever source derived without apportionment among the states, and without regard to any census or enumeration. I feel this leaves the door open for the generation of the national sales tax through a fair tax system. In a manner of speaking the more money you make the more you may spend and pay sales taxes. In this respect the collection of sales or consumption taxes to fund the government activities is the source to which the 16th amendment refers.
www.balancedpolitics.org
http://articles.moneycentral.msn.com/Taxes/Advice/IsHuckabeesFairTaxReallyFair.aspx?page=2
http://economics.about.com/cs/taxpolicy/a/
http://geekpolitics.com/10-pros-and-cons-of-the-fair-tax/
http://en.wikipedia.org/wiki/Sixteenth_Amendment_to_the_United_States_Constitution
(16th amendment)
http://en.wikipedia.org/wiki/FairTax
(fair tax information)
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