The Fair Tax

Posted: Jan 15, 2014 12:01 AM
The Fair Tax

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.

To lessen the burden on those who spend all of their income on necessities, we untax necessities by providing a cash distribution to every family, based on the size of the family.

How do we define necessities? The federal government makes a determination each year as to how much it costs a given sized family to buy its essential purchases. For a single person that number is $11,490. For a family of four it is $31,020. The PRE-bate, coming at the beginning of each month, for a family of four will be $595. Used goods are not taxed. Nothing should be taxed more than once.

To receive the prebate, each family will provide the name, birth date, address and Social Security number of each member of the family just as is done today with Food Stamp applications. That data will be crosschecked against Social Security records to ensure accuracy before an electronic transfer is made.

A study by Dr. David Tuerck, Chairman of the Economics Department and Executive Director of the Beacon Hill Institute at Suffolk University in Boston, concludes that the FairTax-generated revenues would have exceeded actual revenues by $171 billion in 2009 and $267 billion in 2010.

Repealing the code and abolishing the IRS will end the abuses that we have all become familiar with. That agency is out of control and cannot be “fixed.”

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Businesses will be able to do their planning based on the interests of their shareholders, their employees and their customers. Government will no longer have a seat at the table. You will make your personal decisions regarding how to save, invest and donate based on what you choose to do without any tax considerations.

Studies show that 22% of what you currently spend represents the embedded costs of our current tax code. By eliminating those costs, competition will drive them out of the price system. The combination of reduced prices and increased take-home pay will give those who spend all of their income on living expenses a 22% increase in purchasing power.

Twenty trillion dollars, now sitting in offshore financial centers, will pour into our markets, our banks and our businesses creating a booming economy and millions of jobs.

The FairTax rewards hard work and savings and taxes consumption. And, for the first time in over 100 years we will tax wealth rather than wages. We will tax what we take out of society rather than what we put into it.

Eliminating the 73,000 pages of current regulations will save the $500 billion to $1 trillion that we spend each year just to comply with the code and remit our share. Paying nearly a trillion dollars to comply with a law that collects less than three trillion dollars is worse than inefficient…it is stupid!

Moving to a consumption tax will make each of us voluntary taxpayers. We will pay taxes when we choose, as much as we choose, by how we choose to spend and we will be given the greatest gift a free society has to give…anonymity. No government agency should know more about us than we are willing to tell our children!