We have heard the promise of fundamental tax reform for about two years now. It seems that there is some agreement on reducing the numbers of deductions and reducing some tax rates. You will recall that we did that in 1986 and 25 years later it cannot be noticed.
It was disclosed in the last year that the IRS harassed conservative groups and disclosed the confidential information of individuals. It strikes me that this is the perfect opportunity to change the entire way we fund the government. It is time to say goodbye to the IRS.
We should take this opportunity to abolish the IRS and begin to collect the necessary funds to run the government by taxing consumption instead of income.
There are two approaches to taxing consumption. The value added tax is used by many nations. It taxes each addition of value to a product in its manufacturing. Milton Friedman once said that it was the most efficient way to raise taxes and the easiest way to increase the size of government.
The second consumption tax is the retail sales tax that is used by 45 states to fund their governments. I am a supporter of the sales tax. I was the original sponsor of the FairTax in 1999 as a Member of Congress from Georgia. Today it is the most extensively researched and broadly supported tax reform measure before the Congress. It is an entire paradigm shift from how we have been funding our government for the last 100 years.
The FairTax repeals all taxes on income: no more income taxes, payroll taxes, capital gains or death taxes. If you make $52,000 a year your weekly check will be $1,000. Since the average income tax today is 15% and the employee’s portion of the payroll tax is 7.65%, the average take-home pay will increase by 29%.
The tax on income will be replaced by a tax on the purchase of new goods and services. The rate will be 23% of what you pay for at the check out counter. That is not 23% on top of the marked price, but 23% included in the price. If the item you buy is priced at $100, the merchant will keep $77 and send $23 to the government.
There has been some confusion about this method of calculation since states calculate their sales tax as a tax on top of what you buy. However, since we are replacing a tax that is calculated “inclusive” of what you earn rather than on top of what you earn we concluded that to use an “inclusive” rate would be more honest. Both the state and the retailer would be paid for collecting the tax.