What is the Fair Tax?

FairTax

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.orgThe 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
1 person $11,170 $2,569 $214 couple $22,340 $5,138 $428
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 Cons

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?

email









FTC Disclosure of Material Connection: In order for us to maintain this website, some of the links in the post above may be affiliate links. Regardless, we only recommend products or services we use personally and/or believe will add value to readers. Read more here.

37 Comments
Add a comment
  1. I wholeheartedly agree with the concept of the FairTax, and would LOVE to say “bah-bye” to the IRS, but the idea of the prebate makes me nervous…I can most definitely see how we would become dependent on those checks, counting them as income instead of saving them for rainy days. I would like to talk to someone from Alaska who received their annual checks from the State (all eligible AK residents get a check annually based on the revenues from oil sales), and make a determination about how it affects the residents there. That might give us an idea of what a prebate would do to us as a whole.

    • Ben — My understanding of the prebate is that it allows low income families to purchase the goods they would be purchasing anyway without being taxed for those goods. You make a good point that some could become dependent on their checks. But, even if they don’t save the money for a rainy day, they should hopefully be able to spend without creating personal debt, and that spending would be a boost to the economy. By the way, I was not aware that Alaska citizens receive annual checks from the State based on revenue from oil sales. Interesting!

      • As a side note on the prebate, one of the major (unseen) benefits is that it will prevent Congress from telling you what you can and cannot have out of necessity (i.e. picking winners & losers). This will not only eliminate the 1000s of loopholes present in our current tax code, it will remove the possibility of them being opened again under the FairTax.

    • Your use of the word “dependency” seems to imply the prebate will be abruptly yanked away from us; as a bottle from a hungry baby. That isn’t the case. The prebate will forever be a part of our lives and will ensure no legal US citizen ever pay tax on their necessities.

  2. What about people that are nearly retired or have retired? They have paid a tax on their income all of their lives. Now you are going to tell them they have to pay tax on this money at those higher rates when they spend it? That is effectively a double taxation. Seems like there needs to be some sort of phase in based upon age.

    • John, let’s assume you’re correct (you’re not, but let’s assume you are for the sake of argument):
      If we continue under the current income tax system, retirees turning to their savings and Social Security for income face new tax calculations and complications. Most withdrawals from individual retirement accounts and 401(k) plans are taxable. People over 70½ must take required minimum distributions – and usually pay tax as a result – even if they would have preferred not to. Furthermore, any income received over the course of the year, including those 401(k) and IRA distributions, affects whether taxes will be owed on Social Security benefits. In fact, even tax-free income from municipal bonds gets counted in that calculation. All of this directly affects the amount of money a retiree gets to keep. Many retirees find they need to make quarterly estimated tax payments to the IRS, something they may not have done in their working years. And if they work in retirement, they’ll owe Social Security and Medicare taxes as well as income taxes on that income.

      How does the FairTax change that? Plenty of ways:
      • The FairTax ensures Social Security’s soundness by funding it with a progressive, broad-based national retail sales tax, rather than the current regressive, narrow payroll tax.
      • The FairTax rebate zeros the retail taxation of necessities, up to poverty-level spending, for seniors.
      • The FairTax repeals the taxation of Social Security benefits and adjusts Social Security indexing to protect seniors.
      • The FairTax ends all record keeping and income tax filings of any kind for seniors, totally insulating them from the high costs and abusive tactics of tax preparers.
      • The FairTax does not tax used goods, giving low-income seniors choices.
      • The FairTax reduces manufacturers’, services’, and retailers’ costs, allowing them to lower costs to seniors.
      • The FairTax delivers a tax holiday on IRAs and other tax-deferred plans.
      • The FairTax ends gift and estate taxes, along with all of the unfairness to heirs and complex planning for those who earned the money.
      • The FairTax allows seniors to sell their homes and pay no capital gains taxes.
      • The FairTax generates an economic boom, which eases future budget pressure on seniors’ entitlements.
      • The FairTax lowers average remaining lifetime tax rates.
      • The FairTax ensures your grandchildren have the same opportunity you did.

      Tell me again how the FairTax will harm seniors?
      @TXFairTaxer

      • Robert — You mention that the FairTax provides a tax holiday for IRAs and other tax-deferred plans. Does this mean, under the FairTax, that the income taxes that we had deferred will be forgiven? Would our traditional IRAs be treated like Roth IRAs?

        • The income tax imposed on investment income and pension benefits or IRA withdrawals is repealed. No form of savings or investment is taxed. Pension funds, IRAs, and 401(k) plans had assets of over $11 trillion in 2003. An income tax deduction was taken for contributions to most of these plans. All beneficiaries and owners of these plans expected to pay income tax on them upon withdrawal, but are not required to do so once the income tax is repealed. Roth IRA owners and post-tax retirement savers break even.

    • John — good thought, but I am not sure I understand. If the FairTax became law, we would all immediately be living with an entirely new way of paying taxes. One year we would be paying income taxes and the next year we would be paying consumer taxes. It seems to me that we are simply trading one for the other, so I don’t understand how that becomes double taxation.

      Maybe if you could give me an example, I would better understand.

      • Joe, I think what John’s concern was that they were taxed once when they working and that now they are not working they would continue to be taxed. I hope my previous comment addressed his concern, but if it didn’t I trust he’ll let us know soon enough. :-)

  3. Fair tax is basically just a VAT, which do have some nice properties. For starters, they’re somewhat but not overly progressive. This is good, because the problem with the current US tax structure is that a diminishing pool of people are paying in. If it wasn’t for the regressive payroll taxes, we’d be beyond broke. VATs are also business friendly in that they do not tax investment in any way.

  4. Another “con” would be the possible uptick in a black market economy. We should not be naive enough to assume that this will force criminals to participate in a taxable economy. On the contrary, it may encourage *more* people to deal “off the books.” Local farmers may be tempted (or co-erced) to sale on a black market to increase their personal revenues.

    Someone will have to enforce and administrate the program somewhere within the Treasury Department, so, while we might welcome the end of the IRS, there will still be the need for *some* agency to monitor and enforce. The devil we know may be better to deal with than the devil we don’t know.

    • Edward,

      That’s a myth perpetrated by the same politicians who the FairTax will fairly collect taxes from. Sales Taxes historically have a 98% compliance rate. Income Taxes (as reported by the IRS) have an 81-85% compliance rate.

      If it were true an “uptick in a black market economy” would be prevalent, don’t you think the Sales Tax compliance rate would be much lower?

      On the contrary, the FairTax would begin to collect taxes from those people currently in the Black Market by taxing them when they make legitimate purchases; such as food, clothing, housing, and other necessities. Provided, of course, those necessities are NEW and not USED.

      In addition to the “black market”, the FairTax will close the $430B annual tax gap by collecting taxes from Illegal Immigrants, drug dealers, prostitutes, corrupt politicians, and the rest of the underground economy. The 98% compliance rate speaks volumes.

    • I have a couple more points I meant to address with Edward’s comment.

      1) “Local farmers may be tempted (or co-erced) to sale on a black market to increase their personal revenues.”
      #1, farmers are business owners. Under the FairTax they would be tax exempt. The products they buy (for business purposes) would be tax-free, and the products they sell are to other businesses; which are not taxed by either party. Remember, the FairTax is only added at the final point of consumption.
      #2, the FairTax eliminates the largest “farm killer” in the US; the estate tax. Under the FairTax, farmers will be able to pass on their farms to their children and grand kids. Risking that by cheating the system is not a standard characteristic of any farmer I know (and I am married in to a farming family).

      2) “Someone will have to enforce and administrate the program somewhere within the Treasury Department, so, while we might welcome the end of the IRS, there will still be the need for *some* agency to monitor and enforce”.

      Yes, that agency is called “Your State”. Under our current system, the IRS has to deal with 187M taxpayers (that’s 165M individuals & 22M businesses). Under the FairTax, the 165M individual taxpayers (89%) are immediately eliminated from the equation; leaving 22M businesses (11%) to be responsible to their respective states. Don’t forget that 45/50 states today are already collecting sales taxes, so including the FairTax will be relatively simple.

  5. I’m going to respond to your “cons” one at a time:

    1) “The rate is deceptive.”
    Actually, the rate is more deceptive than you might think. It actually has nothing to do with the retail rate; the 23/30 misconception you talk about. After all, those two rates are _exactly the same_ (23% inclusive = 30% exclusive). But no, the real deception is that regardless of the retail rate stated, your _effective_ rate is based on what you spend *above the poverty level*. Here are a couple of examples I’ve posted on my website (and frequently on Twitter):

    Effective FairTax rate for family of 4 after prebate: Spend $30K/yr = 0%
    Effective FairTax rate for A SINGLE PARENT w/ 1 CHILD (after prebate): Spend $30K/yr = 4.68%
    Effective FairTax rate for SINGLE ADULT, NO KIDS after prebate: Spend $30K/yr = 10%

    See, the “deception” is actually in the favor of the tax payer, not the system (as most liberals or politicians would like you to believe).

  6. 2) “The 16th Amendment would need to be repealed.”
    The FairTax sets in motion the Repeal of the 16th Amendment. But there is more to the situation than just repealing an Amendment. Here is a letter from the Texas FairTax State Director:

    Repeal of the 16th Amendment is an extremely big issue. Two of the largest self-proclaimed think tanks, The Heritage Foundation (THF) and CATO list that as one of their biggest, if not THE biggest, issue. Thanks to Dan Mitchell who planted that seed at both the THF and CATO. It has been taken up by Rush Limbaugh, Sean Hannity and Laura Ingraham who broadcasted that comment. In fact, Herman Cain’s recent misstatement—that the 16th Amendment needs to be repealed before we can have the FairTax—may have come as a result of Cain being bombarded by Rush, Hannity, Ingraham, THF, and CATO, with that indoctrination.

    The following post is a rebuttal, written by the Texas FairTax State Director to counter the above argument.

    Since this argument has the biggest disagreements, it requires the longest answer, so:

    Facts to the contrary:

    The FairTax bill, HR 25, has a provision which repeals Sections A, B, and C of the IRS code (ie., all federal income taxes, alternative minimum tax, estate, gift, generation skipping tax, federal corporate income tax, and all payroll taxes and unemployment taxes). The voter would not support HR 25/S 13 if repealing Sections A, B, and C was not a part of the FairTax bill.
    HJR 16, a resolution proposing an amendment to the constitution to repeal the 16th amendment to the Constitution is awaiting passage at the same time the FairTax bill passes.
    Public support to repeal the 16th amendment before a tax replacement is announced, will not happen because the public would not know what to expect.
    Repealing the 16th amendment before a replacement is enacted would kill any reform. That wouldn’t sail past Congress.
    Repealing the 16th amendment after the FairTax passes (although 2/3 vote is required in the House and Senate with ¾ of the states ratifying) is easily conceivable when taxpayers enjoy a full paycheck, no business taxes, a robust economy, and economic growth.
    Difficult to pass any amendment?? Really?? Impossible?? The same was said about women’s suffrage, the Berlin wall. Specific amendments passed: A-18 for prohibition; A-21 repealed A-18; A-17 for direct election of Senators; A-22, 2 terms for Presidents; A-26, 18 year olds could vote; all impossible, right??

    Finally, it will require each taxpayer’s vigilance to assure they speak up when anyone hears there is possible legislation to have an income (or other tax) pass while we have the FairTax. There is also presently no statutory or constitutional provision to prevent a sales tax on top of our present income tax. Why doesn’t a congressman try to pass one? Hint: political suicide. The $22 million market research confirmed that people will not want an income tax with the FairTax. What does the taxpayer like? Have you heard any taxpayers prefer the income tax or flat tax when they know all the facts about the FairTax?

    Past comments were that Congress has enacted our income tax 3 times before, and it stuck. One new difference. There was no other tax plan offered to replace the income tax in the past. There is now…..the FairTax.

    Marvin Kuhn, State Director, Volunteer
    Americans for Fair Taxation

  7. 3) “The sky is the limit.”
    #1, the 23% rate wasn’t just pulled out of a hat (or anywhere else for that matter). The FairTax has 80 world renowned economists, $22,000,000 in research, and 2 large universities behind it.
    #2, studies have been done on the FairTax, both past and future (at the time), and the rate has been confirmed to be legitimate. If you would like to read any of these studies, you can find them all at http://fairtax.org/research

  8. The current tax code, (supposedly at over 70,000 pages) is a mess. Eliminating it in favor of the fair tax or the flat tax (like Herman Cain’s 9-9-9 plan) would put millions of IRS employees and CPA firm employees would be out of work, but American would save billions of dollars in tax preparation fees, countless hours of tax preparation time, and a lot of headache.

  9. 4) “The prebate could be a political football.”
    #1, The President’s Advisory Panel for Federal Tax Reform did not do a study on the actual Fair Tax Act (as written in HR-25). What they actually studied was their own twisted version of it, then they determined that their version wouldn’t work.
    #2, The prebate is estimated to cost $600B annually. What the “advisory panel” failed to take into account was the entitlements the FairTax would eliminate; which currently cost American Taxpayers $945B. So, yes, technically it would be “the largest one”, but collectively it doesn’t compare.
    #3, The prebate is a solid calculation that cannot be changed willy-nilly or at the whim of a few Congressmen.

    `SEC. 301. FAMILY CONSUMPTION ALLOWANCE.
    `Each qualified family shall be eligible to receive a sales tax rebate each month. The sales tax rebate shall be in an amount equal to the product of–
    `(1) the rate of tax imposed by section 101, and
    `(2) the monthly poverty level.

    (1) IS the FairTax Rate, (2) is based on the Department of Health & Human Services calculation of the poverty level; which is reassessed annually.

    What that says is that the prebate will be 23% of the poverty level. This is written this way to ensure that Taxpayers are not over or under paid on their prebate check each month.

    I hope this helps!!

    @TXFairTaxer

    • Robert,

      It does help. I appreciate all of your responses to my “cons”. They are well thought out and substantiated with relevant facts. Let me ask: in your opinion, are there any downsides to the FairTax, as described in this article?

      • I’m glad I could help. The FairTax isn’t perfect, if that’s what you’re asking. As with anything there are faults, but the few present in the FairTax system are easily shadowed by all the good it can do.

        The #1 major flaw in the FairTax is that it takes power away from DC. Which, by the way, is why it is so widely lied about. The majority of Congress does not want it to pass. If it does, they know they will lose BILLIONS of dollars in Lobbyist funding. Large corporations would no longer be able to shell out money for Congress to hand out tax favors or pick winners & losers (see: Solyndra).

        The #2 major flaw with the FairTax is that (because of #1) it must be pushed by the Grassroots. We the People MUST ensure our Congressional Leaders know we want the FairTax, but unless 50.1% of constituents in at least 218 congressional districts let their delegates know, it simply won’t happen.

  10. Hank Van Gieson

    Robert,

    You aren’t even close to identifying the major problems with the Fairtax scheme. Pay attention, Joe. Here is my take after seven years of study and debate.

    (1) The Fairtax won’t work! According to unbiased economic experts, any retail tax rate over 10% or so will fail. The proof is that six nations have tried such a broad based sales tax and quickly switched to a VAT. Tax avoidance and tax evasion will be major problems, particularly for a tax plan with a 30%+ rate. And, when it becomes clear that the Federal government can not tax State and Local government consumption, the rate will rise to 43%. Add a 7% State sales tax and we would be dealing with a 50% sales tax. No way can that work, despite the enthusiasm of the Fairtax advocates.

    (2) The Fairtax scheme is unfair, particularly to middle class retirees for at least two reasons. First, middle class retiree share of the federal tax burden will rise dramatically. For instance, a middle class retired couple living comfortably on $50,000 from Social Security and savings/investments now pay less than $1,000 in federal taxes. Under the Fairtax, their net federal tax after the prebate would be $3625 even after reducing their taxable spending to three quarters of their gross. How fair is that? And, everyone’s current after tax savings would be double taxed when spent. Is that fair?

    In addition, the Fairtax would cause retail prices to rise by 15-20% despite what some have claimed on this blog. If we are to get 100% of our pay/pensions, retail prices have to rise. There is no free lunch!

    The Fairtax scheme would also destroy our Social Security concept as presently understood. Rather than paying in during your work years and then drawing benefits with no additional payments, the Fairtax portion of Social Security payments would be for life. Think about it! And, don’t look for banks to make home loans on the tax included in the price. There is no collateral value in a federal sales tax. Can you come up with 50% down to get a mortgage insurance free loan? The new home market could be in big trouble.

    There is a lot to be said for a consumption tax, but the Fairtax is not the way to go. Stay tuned!

    • While I don’t totally disagree, I will say Canada has had a 15% sales tax for a decade. I think it breaks down to 8% Federal and 7% provincial.

      • Julie,

        On top of the Canadian Federal Sales Taxes (which vary from 5-15.5%), income taxes in Canada constitute the majority of their annual revenues. What Canada employs is a version of the VAT; which, in most cases, is a combination of Sales Taxes (added to each level of production) and Income Taxes. Their Income Taxes are nearly as high as ours here in the US; AND they have their sales taxes.

        The US currently has the ability to employ this method of taxation but chooses not to. The FairTax will further ensure that we do not allow our Government to head that direction by Abolishing the IRS, eliminating the Internal Revenue Code dealing with Income Taxes, and Repealing the 16th Amendment.

    • Well well, glad to see you finally found another good conversation to muck up, Hank.

      Joe, this is one of those “lobbyists”, I referred to before. Hank (with aliases such as Linda, Linda Little, or vanLinda) and friends such as Mark Curran are paid to derail the FairTax. He will surely come back with something along the lines of how I’m “attacking the messenger and not the message”, but if you Google “FairTax” and look at the other conversations that have ensued, Hank is always a part of them and pretty much always states the same thing, over and over again, regardless of our replies to him on previous occasions.

      1) No other Nation has tried anything like the FairTax. The FairTax is unique and can only be applied to the United States Economy. I’m sure other countries could make some major adjustments to the FairTax and adopt it to their country, but as written it wouldn’t work anywhere else and it has never been tried. The initial $22Million in research that went into the FairTax was strictly based on the US Economy. Our economists referenced the many other plans to ensure we wouldn’t make the same mistakes those other countries did, like “switching to a VAT” (as Hank states).

      As I previously stated, Sales Taxes have a 98% compliance rate, that is a well known and documented fact. Because it generally takes two people (a seller and a buyer) to cheat the sales tax system it is much more difficult to game than the current income tax system. I’m not saying it is impervious to cheats, as 98% does fall short of 100%, but it is much more difficult than cheating our current income tax system (as the 81-85% compliance rate suggests).

      2) I’d like to see actual proof of anyone paying $1000 tax on $50,000 of income (benefits or not). According to the SSA, 85% of benefits are taxable above $44,000 for a married couple. Under the FairTax, for that couple to actually be taxed more they would have to spend 100% of their earnings on NEW goods/services. If they decided to save even a small portion or somehow not spend 100% of it, they would either break even or come out ahead. That’s the good thing about the FairTax, it gives you that choice to spend if you want to pay taxes or save if you don’t want to.

      Either way, the IRS is gone, and Social Security can continue to be funded, and the kids and grand kids of those seniors can look forward to a better life.

  11. If the money will be collected at state level how will it be distributed/used?
    Will more populated states have more funding than those with fewer inhabitants?
    Won’t lobbyists simply shift their focus to the state politicians?

    • BTW thank you for interesting and enlightening article.

    • Great questions, Julie.

      “If the money will be collected at state level how will it be distributed/used?”
      The States won’t have any hands in the Federal monies other than collection/remittance. Here’s how the hierarchy of the FairTax works: Businesses collect the FairTax (as they would other Sales Taxes) and remit 99.75% of said taxes to the State (I’ll explain that 0.25% later). When the State receives the FairTax, they remit 99.75% of the FairTax to the Department of the Treasury. States and businesses that collect the FairTax are given 1/4 of 1% for the time taken to ensure the FairTax is collected/remitted.

      “Will more populated states have more funding than those with fewer inhabitants?”
      Money the States receive will be based on the amount of taxes collected (as do businesses). The rate at which both businesses and States are given (0.25%) is equal amongst the States. It wouldn’t make sense to pay Wyoming the same dollar amount as California is paid, would it? Seening as Wyoming has a mere 1.5% of the population California does. We’re not seeking to redistribute the money.

      “Won’t lobbyists simply shift their focus to the state politicians?”
      I believe this question is nullified by my other answers, but if it isn’t could you please restate it, as I no longer see how this would be relevant.

      • Since the feds still end up with the money, the lobbyists would still be there trying to influence how it’s spent, if not how or from whom it is collected. There remains just as much potential for corrupt politicians.

      • Since the feds still end up with the money, the lobbyists would still be there trying to influence how it’s spent, if not how or from whom it is collected. There remains just as much potential for corrupt politicians.

        • Julie,

          Lobbying for “tax breaks” would be non-existent, as tax breaks apply to income taxes. This is one of the great purposes of the Family Consumption Allowance (aka “prebate”). What the prebate does is exempts *everything* below the poverty level. And if everything is already exempt, there is no need to lobby for further exemptions.

          There will be other types of Lobbyists (NRA, NSBA, NAACP, ACLU, etc) who are still able to lobby for our rights, but those lobbyists lobbying strictly for tax breaks would quickly become extinct.

        • And yes, some Corrupt Politicians will likely remain, as they are in DC for many reasons other than simply money; power is the 1st thing that comes to mind. But those who are there because of the money would quickly learn, under the FairTax, that their power to give tax favors or pick winners (& losers) would disappear immediately.

  12. Hank Van Gieson

    Robert,

    You may call it “mucking up”, but I believe it is an honest effort to get the facts out to folks here that really want to understand the Fairtax. And, you are way off base by even suggesting I get paid to provide the facts. I’m a 78 year old retired Air Force pilot who was shot at and missed in two wars, defending your right to write any fool thing you want. But, I don’t have to take your nonsense without responding. Frankly, you are representative of the Fairtax cult members that can’t rebut my claims and lash out at the messenger. Stick to a factual exchange and we all might learn something!

    (1) Sales taxes in the States may have a 98% compliance rate, but my point is that tax rates over 10% have been proven to break down. Please understand that it does not take two to cheat under the Fairtax. That is just false. You may pay the full tax on whatever you purchase, but there is no dual reporting involved. You know you paid, but you have no idea if the business cooked the books in order to under report federal tax revenue. That is why compliance will break down, particularly at rates of 30% or more. Do you really believe that the Federal government can catch businesses who employ smart book keepers? Can’t be done! And I’d like to also suggest that there may be some State Treasurers that might feel that the federal revenue would be better spent at the State level without washing it through the fed.

    (2) As for my tax calculations for a retired couple with a gross of $50,000, get out your 2011 1040 Instructions and you can do your own analysis. Mt conclusions are based on that couple getting $26,000 from investments and $24,000 from two average SS checks. If you do the SS calculations, it turns out that only $3,000 is taxable. So, the total taxable income is $29,000 and after deducting the standard deductions and exemptions, taxable income is $10,000. In 2011, the tax is $1,000. Check it out, my friend, but I am a Volunteer Tax preparer for AARP with complete access to the IRS software. And, my Fairtax calculations are based on only 75% of their gross going to taxable purchases. Are you reading comprehension challenged?

    As for the role of the States, Julie needs to understand that it is likely that the States will not choose to act as the Federal tax collector. The States are already on record as opposing any form of Federal Consumption tax, and with good reason. Just Google the National Governors Association and find their latest tax policy paper. Seems clear to me.

    I also think you are overlooking the education exemption in HR25. The camels nose is already under the tent flap, and there is nothing to prevent some Senator or Congressman from proposing to exempt home mortgages or health care or anything else he might feel is just as important as education tuition. The lobby union is far from dead.

    • Hank — Just curious. Do you have any ideas on how to fix our current income tax system? Or maybe it is fine like it is. Thoughts?

  13. YAY for the FairTax! There are so many great reasons for getting out of our current situation and into a better solution.

    Even the Cons aren’t as bad as they seem:

    1) The Rate Is Deceptive: This is a glass is half empty of half full arguments. Either way we are paying a competitive price that isn’t being inflated because companies have to pay 1/2 employee’s income taxes

    2) The 16th Amendment would be repealed: This is a con? However, you do have a point and we would need to keep Congress in check (which we should be doing anyway).

    3) Sky is the limit: Maybe, but I expect taxes to increase and become more complicated in the current system anyway

    4) The prebate could be a political football: No surprise there. We already have a bunch of people relying on Govt. programs and a prebate simply replaces all these social programs with one that is fair to everyone because it is given to everyone.

    Great article!

  14. Hank Van Gieson

    Joe,

    Thank you for asking. Throwing hand grenades without an alternative would be not my style. Years ago, I wrote AFFT and suggested that they concentrate on just replacing the income tax. In my opinion, the Fairtax tries to do too much, too quickly.

    I call my alternative Fairtax-Lite. It is a broad based 10% revenue neutral federal consumption tax that replaces just the income tax, with no exclusions, no inventory tax credits, a targeted Family Consumption Allowance (prebate), no taxation of government consumption, and phases in over a five year period.

    In the years following my first try at an income tax replacement, I have learned a lot more about the benefits of a VAT, so I believe the right approach is to make the federal consumption tax a VAT. There will be a lot of knee jerk criticism of my plan, but if you will email me, I’d be happy to send you my complete study with all the rationale and details.

    Thanks for your interest.

    Hank Van Gieson
    LTC(RET)USAF
    Hendersonville, NC
    vanlinda777@gmail.com

  15. Great article but the comments were even better! I was going to clarigy some of the “cons” but the other posters beat me to it. Now lets get the right people into office so we can vote this into law.

Add a comment

*

Name: Your best email address: 5 subscribers No spamming ever. Unsubscribe at any time. Email Marketingby GetResponse