Pardon my cynicism, but the term “Fair Tax” sounds like an oxymoron. After all, is it possible for ANY tax to be fair? Perhaps, but fairness is in the eye of the beholder – FairTax (all one word for the proponents) supporters unabashedly espouse the fairness while opponents point out possible flaws. Myself? I confess giddiness at the thought of abolishing the IRS, but I realize that I need to keep both eyes open. Join with me as we take a look at the good and not so good aspects of the FairTax.
What is the Fair Tax?
According to their web site, FairTax.org, “The FairTax is a national sales tax that treats every person equally and allows American businesses to thrive, while generating the same tax revenue as the current three-million-word-plus word tax code. Under the FairTax, every person living in the United States pays a sales tax on purchases of new goods and services, excluding necessities due to the prebate. The FairTax rate after necessities is 23% and equal to the lowest current income tax bracket (15%) combined with employee payroll taxes (7.65%), both of which will be eliminated.”
The Pros (according to FairTax.org)
Americans take home 100% of their paychecks.
With no withholding for income tax or Social Security, workers would keep all of their paychecks. The exception would be state income taxes, but there will be no federal payroll deductions of any kind.
A “prebate” will keep the tax fair for all workers.
FairTax.org explains this prebate as follows: “While permitting no exemptions, the FairTax (HR25/S13) provides a monthly, universal prebate to ensure that each family unit can consume tax-free at or beyond the poverty level, with the overall effect of making the FairTax progressive in application. This is not an entitlement, but a rebate (in advance) of taxes paid – thus the term prebate. Everyone pays taxes at the cash register.” Note that only legal residents qualify for the prebate.
The following table details this prebate for 2012. It is based on the 2012 HHS Poverty Guidelines as published in the Federal Register on January 26, 2012.
|One-adult household||Two-adult household|
|Family Size||Annual Consumption Allowance1||Annual Prebate||Monthly Prebate||Family Size||Annual Consumption Allowance1||Annual Prebate||Monthly Prebate|
|and 1 child||$15,130||$3,480||$290||and 1 child||$26,300||$6,049||$504|
|and 2 children||$19,090||$4,391||$366||and 2 children||$30,260||$6,960||$580|
|and 3 children||$23,050||$5,302||$442||and 3 children||$34,220||$7,871||$656|
|and 4 children||$27,010||$6,212||$518||and 4 children||$38,180||$8,781||$732|
|and 5 children||$30,970||$7,123||$594||and 5 children||$42,140||$9,692||$808|
|and 6 children||$34,930||$8,034||$669||and 6 children||$46,100||$10,603||$884|
|and 7 children||$38,890||$8,945||$745||and 7 children||$50,060||$11,514||$959|
No more tax evaders.
The FairTax site reports that tax evaders and the underground economy cost each taxpayer $2,500 a year. However, because all new goods and services will be taxed at the cash register, these “cheaters” will have no choice but to pay their taxes.
Social Security and Medicare funding will be stabilized.
Social Security, like all federal spending programs, will continue to operate like it does today. However, its funds will come from a broad sales tax base instead of a narrow payroll tax.
No more Internal Revenue Service.
With the FairTax in place, the IRS is no longer needed. Retailers will collect the FairTax just as they do now with state sales taxes. All money will be collected and remitted to the U.S. Treasury, and both the retailers and states will be paid a fee for their collection service.
The rate is deceptive.
The 23% rate is misleading; it is wrapped into the purchase price instead of being added to the purchase price (the way we commonly figure sales taxes). For example, a $100 (grand total) purchase would include $23 consumption tax and $77 for the item or service purchased. Therefore, the sales tax rate, as we traditionally understand it, is 23/77, or about 30%.
The 16th Amendment would need to be repealed.
This is the Amendment which authorized Congress to impose an income tax. Of course proponents of the FairTax salivate over the thought of doing so, but reality is that Congress would be reticent to repeal this Amendment. The problem of trying the FairTax without repealing the 16th Amendment is that we could conceivably end up with a VAT (value added tax) in addition to the income tax.
The sky is the limit.
According to Wikipedia, “After the first year of implementation, this rate is automatically adjusted annually using a predefined formula reflecting actual federal receipts in the previous fiscal year.” This sounds fair, but here is the problem: we won’t know if the 23% is a workable number until AFTER the plan is implemented. What if we discover that it is not nearly enough? This automatic adjustment will free Congress from responsibility for a built in tax increase. Hmmm.
The prebate could be a political football.
The President’s Advisory Panel for Federal Tax Reform states that the prebate would be the largest entitlement program in American history – that it would “make most American families dependent on monthly checks from the federal government.” For politicians who campaign on cutting taxes, the prebate amounts could be targeted.
Will the FairTax ever become law?
Obviously, it has several huge hurdles to jump, but Congressman Ander Crenshaw from Florida, who has backed Fair Tax legislation every year since 2006, continues to hope. On September 24 of this year, Crenshaw wrote in his blog, “Recently, the House of Representatives made headway toward growing the economy and putting Americans back to work by passing the Job Protection and Recession Prevention Act, the Red Tape Reduction and Small Business Job Creation Act, and the Repeal ObamaCare Act. Add the FairTax to that list, and we’ve given the nation yet another tool with which to build a solid foundation for the future. It’s a vote Congress needs to take, and I’m fighting to see that it happens sooner rather than later.”
One never knows. For better or worse, we may some day have a Fair Tax instead of the IRS.
If you had the power to institute the FairTax and abolish the IRS, would you do it? Why or why not? What additional benefits or disadvantages can you think of?