A Comparison of FairTaxSM, Income Tax, and Flat Tax

Current Income Tax: No Change. Flat Tax: No Change. FairTax: Proposes repeal. Complexity

Current Income Tax: Very complex. 20,000 pages of regulations. IRS incorrect over half of the time. Flat Tax: Witholding continues. Individuals and businesses must still track income and file income tax forms. FairTax: Individuals do not file. Businesses need only to deal with sales tax returns. Congressional Action

Current Income Tax: Used by lobbyists and the wealthy for tax breaks and loopholes. Used by bureaucrats for social engineering. Flat Tax: Has some problems, but is far superior to current law. FairTax: 23% Linder/Peterson FairTax Act (H.R. 25). Employees receive 100% of pay. Social Security and Medicare funded from consumption tax revenue, not your paycheck. Cost of Filing

Current Income Tax: $225 billion in annual compliance costs. Flat Tax: Significant simplification costs are somewhat reduced. FairTax: No personal forms are filed. Significant cost savings. Economy

Current Income Tax: Taxes savings, labor, investment, and productivity multiple times. Flat Tax: Imposes a tax burden some of which is still hidden in the price of goods and services. FairTax: Un-taxes wages, savings, and investment. Increases productivity. Produces significant economic growth. Equality

Current Income Tax: The current tax code violates the principle of equality. Special rates for special circumstances violate the original Constitution and are unfair. Flat Tax: A flat tax is an improvement of the current income tax, but it is still open to manipulation by special interests. FairTax: Taxpayers pay the same rate and control their liability. Tax paid depends on life style. All taxes are rebated on spending up to the poverty level.

Current Income Tax: Current tax code places unfair tax burden on U.S. exports and fails to neutralize tax advantages for imports. Flat Tax: A flat tax taxes exported goods and does not tax foreign imports to the U.S., creating unfair competition for U.S. manufacturers and businesses. FairTax: Foreign companies are forced to compete on even terms with U.S. companies for the first time in over 80 years. Government Intrusion

Current Income Tax: Current tax code requires massive files, dossiers, audits, and collection activities. Flat Tax: A flat tax still requires personal files, dossiers, audits, and collection activities. FairTax: As the Founding Fathers intended, the FairTax does not directly tax individuals.

Current Income Tax: The 1913 income tax has evolved into an antiquated, unenforceable morass, with annual tax returns long enough to circle Earth 28 times. Flat Tax: A flat tax just won’t stay flat. Starting out nearly flat in 1913, the income tax grew out of control with top rates over 90% until the Kennedy administration. FairTax: 45 states now use a retail sales tax. Interest Rates

Current Income Tax: Pushes rates up. Biased against savings and investment. Flat Tax: Reduces rates 25-35 percent. Neutral toward savings and investment. FairTax: Reduces rates by an estimated 25-35 percent. Savings and investment increase.

Current Income Tax: Biased against savings and investment. Flat Tax: Neutral toward savings and investment. FairTax: Increases investment by U.S. citizens, attracts foreign investment. IRS

Current Income Tax: Retained. Flat Tax: Retained with reduced role. FairTax: Abolished.

Current Income Tax: Hurts U.S. companies and decreases available jobs. Payroll tax a direct tax on labor. Flat Tax: Positive impact on jobs. Does not repeal payroll tax on jobs. FairTax: Makes U.S. manufacturers more competitive against overseas companies. Escalates creation of jobs by attracting foreign investment and reducing tax bias against savings and investment. Man-hours Required for Compliance

Current Income Tax: Over 5.4 billion hours per year. Flat Tax: Reduced. FairTax: Zero hours for individuals. Greatly reduced hours for businesses. Non-filers

Current Income Tax: High tax rates, unfairness and high complexity harm compliance Flat Tax: Reduced tax rates and improved simplicity will improve compliance. FairTax: Reduced tax rates and fewer filers will increase compliance. Personal and Corporate Income Taxes

Current Income Tax: Retained. Flat Tax: Retained in a different form. FairTax: Both are abolished. Productivity

Current Income Tax: Inhibits productivity. Flat Tax: Increases. FairTax: Increases.

Current Income Tax: Decreases savings. Flat Tax: Increases savings. FairTax: Increases savings. Visibility

Current Income Tax: The current tax code is hidden, embedded in prices, complex, and incomprehensible. Taxes are withheld from paychecks. Flat Tax: The business component of the flat tax and payroll taxes are hidden and would be embedded in prices. Taxes are withheld from paychecks. FairTax: The FairTax is highly visible and easy to understand. No tax is withheld from paychecks.

"I earn $1000, pay 20% income tax on it,net $800, put it in the bank.
The Fair Tax passes.
I then take that money and buy something. I'll pay 23% or whatever tax on the purchase.
That's not double taxation?"

Class is back in session. It is the same double taxation that you are paying today. Consider:

You earned $1000, and paid income tax and FICA tax, leaving you $800, which you put into the bank.

When you take that $800 out of the bank and buy a retail item today, the $800 total price of the item is made up of two pieces:
* the cost of all of the company's shares of FICA taxes, medicare taxes, excise taxes, corporate income taxes, accounting to satisfy IRS regulations, and the cost of the tax accountants and tax attorneys and executive time used to minimize the impact of those taxes, and the cost of lobbyists who get millions of dollars every year trying to influence congress to pass tax breaks for them. Several economic studies have been done and estimated the cost of all of that stuff is, on average, about 22%, or $176 on your $800 item. This study is available at FairTax.org.
* the cost of the materials, labor, and transportation for actually producing, distributing, and selling the item, plus a profit for those in the sales and supply chain, about
$800 - $176 = $624.

Now ... keep that $800 in the bank, pass the FairTax, and then buy the same item. The un-taxed price of the item will still be about $624 (because the companys will not be paying that FICA, etc. taxes), so when the 23% embedded sales is added in, the price to you is about $810, and the seller then sends about $178 to the government.

What?? you say that companys are greedy and will not lower their prices when their tax costs go down? Then you don't believe in the law of supply, demand, and competition. There are lots of examples of this happening when taxes were removed from items -- see Boortz's book.

If you want to call this double taxation, fine - just recognize that it is the same double taxation you are paying now.

So you break even on retail sales. (OK, depending on the industry, it might be a little more or a little less -- the Fair Tax Book by Boortz shows the embedded tax rate for a lot of industries, from leather at 16% to food at about 22% to communications at 26% -- with an average of about %22%). If you buy something used at a flea market ... no national sales tax -- it only applies to retail goods.

Moreover, the FairTax rebate prebates you the sales tax for "necessities" (e.g., $366/month per married couple, more if you have kids).

Remember, if you are still working, you get your whole paycheck -- no deductions for income tax, FICA, and medicare. So you get more money and pay the same amount for retail goods. Everybody wins.

What .. how can everybody win? Because you are removing the costs of non-productive labor. Those tax accountants may as well have been building pyramids as far as I am concerned. Eliminate them, I don't have to pay them, and I still get my goods at a price lower than I can get them today.

Thus endith the Class.

Seriously ... go to FairTax.org and/or read Boortz's FairTax book -- he makes the case in 175 pages much better than I can in several hundred words. This is a serious issue, and deserves serious consideration.

What?? you say that companys are greedy and will not lower their prices when their tax costs go down? Then you don't believe in the law of supply, demand, and competition. There are lots of examples of this happening when taxes were removed from items -- see Boortz's book.

You mean the part of the book that says we get to keep all of our pay check and tax-inclusive price would be the same?!? You mean the part of the book he basically retracted and stated that prices can only go down significantly if wages are reduced?

From Boortz's site:

As explained in The FairTax Book, there are taxes embedded in everything we buy. Every entity which provides a product or service in the design, production, marketing, distribution and sale of every consumer good or service will incur some tax liability as they perform their particular function. This tax liability will be incorporated into whatever these individuals or business entitles charge for their services, and will all passed through to become a part of the final cost of the product or service.
Now here's what we didn't explain well in the book. Every employee of any company involved in American commerce is also a provider of a service, and, as such, the employee incurs a tax liability as a result of his or her work. This tax liability is incorporated into what the employee charges the employer for their services, and is eventually incorporated into the final retail cost of the employer's product or service. Each employee is essentially a separate business entity providing a product, be it physical or mental labor, to the employer.
The extensive research behind HR 25, The FairTax Bill, shows that the average embedded taxes in every consumer product or service is about 22%. In some industries, such as leather goods, the embedded tax is smaller. In other industries, such as homebuilding and construction, the embedded tax is higher, but it averages out to somewhere between 22 and 23%. With the passage of The FairTax Bill, those embedded taxes disappear. These embedded taxes include the combined tax burdens of all entities involved in bringing those goods or services to market, and that includes you, the employee, and the taxes you incur as a result of your employment.
We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So ... what does this mean to your paycheck after the FairTax becomes law?
When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call "take home pay" before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay -- the amount you can put into your bank account -- will not decrease, and may actually increase.
On a larger scale real wages will rise to the extent to which the nation's employers decide to return the embedded costs of their employee's income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax. Once again, a zero-sum, revenue neutral game.
Now, let's elaborate on the "keep 100% of your paycheck" line that appears in The FairTax Book. It is certainly true that after the FairTax becomes law there will be no more withholding from your paycheck for any federal taxes. What you earn is what you get. This is not to say that your gross pay will equal what it was before the FairTax. This will depend on what your employer does when the embedded costs represented by the tax burden you have passed on to your employer disappear. One thing is certain: You will suffer no decrease in real or net earnings --- the amount of each paycheck you deposit into your bank account every other week. The "keep 100% of your paycheck" concept can more easily be applied to those who either change jobs or come into the labor force after the implementation of the FairTax. A new worker will negotiate a wage with an employer knowing that the amount negotiated will be the amount that worker receives every two weeks ... no deductions. Likewise, when you change employers you, too, will negotiate a wage that will not be subject to withholding, and you will get 100% of your wages in each paycheck.

source

"...You mean the part of the book he basically retracted and stated that prices can only go down significantly if wages are reduced?"

The "wages are reduced" only if you count the taxes as part of the wages. Consider:

TODAY

Let's say you are currently paid $1000 for a job. Let's make the numbers simple and assume that FICA plus Medicare total 8%, and that you are paying an effective income tax rate of 15%. Then you receive a paystub that says you earned $1000, but $80 is taken out for FICA, and $150 is taken out for income tax, leaving you $770 cash you can spend.

The employer then writes a check to the IRS for $80 + $80 (employer match FICA) + $150 = $310.

The total raw labor cost to your employer is $1000 + $80 (matching FICA)= $1080

POST FAIRTAX

Assume Fairtax passes. How much would the employer have to pay you so that you still had $770 in your pocket at the end of the week?

Answer: $770.

Wait a minute: you used to "earn" $1000, now you only "earn" $770 ... haven't your "wages been reduced"??

Answer: it depends on what you call "wages". Your pre-tax wages have in fact been reduced, but your post-tax wages are exactly the same. When you use the phrase "your wages have been reduced", the usual connotation is that you will wind up with less money in your pocket at the end of the week; in this case, the connotation is incorrect.

If you wanted to demagogue this issue instead of having a rational, considered debate, you would scream, "If the Fair-Tax is passed, every worker in America will have their paycheck cut". (Democrats are good at this). And that statement would be both true and misleading -- it would be true (gross pay is reduced), but would mislead the uninformed into believing that if Fair-Tax was passed, the listener would wind up with money in his pocket at the end of the week.

Why would prices go down?

Note that your employer has saved a total of $310 for the labor you provided, so this can be used to reduce the pre-sales tax price of his product, so that the total price of his product will remain about the same when national sales tax is included. Additional savings will come from the reduced cost of supplies, reduced CPA expenses, and elimination of corporate income taxes.

Suppose you refuse to work for the $770 cash, and insist on being paid the full $1000 (or even the full $1080). Then the employer would have four choices:
a) refuse to employ you at that price, and hire some one else at the $770 price;
b) pay you the $1000 and accept less profit;
c) pay you the $1000 and raise prices; or
d) some combination of paying you more money, accepting less profit, and raising prices.

But ...
a) if your employer could afford to pay you more money then, he could give you more money now;
b) if your employer was willing to accept less profit then, he would be willing to accept less profit now, and enjoy the larger market share he would get from lower prices now; and
c) if your employer could get away with raising prices then, and still sell the same amount of stuff, he could raise his prices now, and sell the same amount of stuff, and increase his profits.

Prices, wages, and profits are where they are because of competition -- and so the same competition post-Fair-Tax would result the same net wages, prices, and profits as today (on average).

If everybody gets the same wages and pays the same prices, why bother?

Well ... not everybody would get the same wages. For example, some CPAs who file tax returns and all the people working for H&R Block who help people with income taxes would have to find another job. While that is a bad thing for them in the short run, it is a good thing in the long run.

Think of it this way --- ultimately, the country is full of makers and takers.

The "makers" collectively make all the stuff that everyone wants to consume - electricity, TVs, TV programs, VCRs, computers, telephones, food, cars, gasoline, etc., and transportation and storage of that stuff to a location where you can consume it.

When you make some of the stuff, you are allowed to get other stuff in return - if you grow food, you exchange some of it for clothing, TV programs, etc. Money is used to keep score. To simplify the discussion, assume everyone makes stuff during the day, and goes to exchange their stuff for other stuff every evening.

But ... when you go to exchange some of your stuff for other people's stuff, you find that there are a bunch of Takers who get there first -- people who don't actually make anything, but who take stuff anyway. They are headed by politicians, who take some stuff for themselves, and direct a whole bunch of stuff to be given to other people who don't make stuff either. So, when you get there, there is less stuff for you to get.

Suppose you saw about 10% of the population building pyramids for the politicians, and another 10% of the population laying around enjoying a life of leisure while you were working to make stuff, and the politicians made sure that they all got their stuff before you got there to exchange your stuff.

You might get a little upset and say, "Wait a minute, those guys building pyramids may be working hard, but they aren't making any stuff! If they made stuff too, then when I went to exchange my stuff, there would be a lot more total stuff to choose from, and I would be able to take home more stuff in exchange for my stuff!"

The people feeding the current tax system (e.g., income taxes, payroll taxes, estate taxes, excise taxes), whether people in the payroll department who do the bookkeeping for collecting them, to the CPAs to file the returns, to the tax consultants and tax attorneys and tax "experts" and people who lobby congress for tax breaks, to the IRS agents and their management and tax courts ... as far as putting stuff in your house, they may as well be building pyramids. The total cost of collecting the taxes has been estimated to be over 25% of the total taxes collected.

If you can get the same revenue by eliminating them, they all would have to go to work making stuff instead of building pyramids, and that would ultimately result in you going home with more stuff at the end of the day (whether because of lower prices or higher wages).

This is not rocket science -- eliminating unproductive parts of any process will result in a more productive process (i.e., more stuff). That is the undeniable result of passing the Fair-Tax.

Screaming that wages will be reduced is either ignorance of the real underlying debate or demagoguery.

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