The FairTax and it's Implications for the U.S. Economy (Part II of Income Tax)

Imagine if all of these trillions of dollars were added back to the American economy. On top of that, imagine saving the $500 billion compliance costs every year. These two things would give a huge boost to the American economy. Fortunately, there is a plan to make this happen, a plan sponsored by Georgia Representative John Linder. The plan is called The FairTax, or H.R. 25. Part II of this paper will describe The FairTax.

Officially called the FairTax Act of 2005, the FairTax would do many things to simplify the way Americans pay taxes, including completely abolishing the Internal Revenue Service. The FairTax would replace many of the taxes Americans pay, including the individual income tax, the alternative minimum tax (AMT), corporate and business income taxes, capital gains taxes, Social Security taxes, Medicare taxes, the self-employment tax, estate taxes, and gift taxes (Boortz 74-5). The elimination of all of these taxes would allow workers to take home all of their paychecks. No withholding and no income taxes. That's right, people would get to choose when they had to pay money to the Federal Government, and that would be at the retail counter. Their money would not be forcibly taken from them.

Notice the word replace in the paragraph above. Many politicians tried using scare tactics in the 2004 election, telling the people that their opponents who supported the FairTax would be adding the FairTax on top of all those other taxes. This is simply not true (81-2). The FairTax would replace all of those taxes. The FairTax is neither a tax cut nor a tax hike, but an alternative method of gathering revenue for the Federal Government (75). Remember the 22-cents-out-of-every-dollar embedded taxes described in Part I of this paper? Take all of those taxes out, and institute a 23-cents-of-every-dollar consumption tax, and the prices of goods and services haven't changed much.

What is the FairTax? The FairTax is a proposed national consumption tax on new goods and services at the retail level. Only new goods are included for two reasons: First, goods should only be taxed once, not every time they change hands and second, taxing only new goods keeps things simple. Imagine the bureaucracy that would be needed for all people to keep track and correctly file their taxes whenever they sold their car, etc. We are trying to move away from all of that complexity!

In Part I of this paper, I mentioned the IRS tax code and how it exceeds 54,000 pages and 2.8 million words (Americans for Fair Taxation). Ordinary Americans do not have the time to interpret this abomination called the tax code. We have to pay others called CPAs (Certified Public Accountants) to do it for us. Think about this: we have to pay people money in order to pay the government money. How ridiculous! With the FairTax, businesses would just collect the consumption tax at the time of purchase, much like they already do in states where there is a sales tax. This saves time, and money. Americans will be paying the same amount of taxes, while not having to pay CPAs. More money in the pockets of Americans (generated by not having to waste time and money with CPAs) means that Americans will have more money to spend on consumer items, and thus will be creating even more tax revenue! Additionally, those 5.8 billion hours (Boortz 43) that I mentioned earlier will be spent on producing. When Americans as an aggregate spend 5.8 billion hours trying to pay the Federal Government money, they are not at their jobs or at home doing anything truly meaningful. They are, in essence, wasting time. With the FairTax, and without the IRS, those 5.8 billion hours would add to the economy, generating more income for people to spend, which would then generate more revenue for the government. Those hours would also allow for more quality of life, giving parents more time to spend with their kids, etc.

While companies are forced to make tax-decisions they are hindered in making economic and capitalistic decisions. Eliminating the income taxes, both personal and corporate, and instituting the FairTax would help businesses. This is especially true of small businesses.

"President Bush recognizes that supporting Americaâ€™s small businesses is critical to ensuring continued job creation. Small businesses create two-thirds of new private sector jobs in America, employ more than half of all workers, and account for more than half of the output of our economy." (The White House)

Small businesses employ more than half of all workers and generate more than half of our economy. Wouldn't it make sense to help small business owners? Help them out, and what do you get? More employment and an extended production possibilities curve. What kinds of things hinder small businesses? Taxes, and more specifically, personal income taxes and self-employment taxes. Because small businesses are small, the owners typically pay taxes on the personal level or as small corporations. Because they are small, these taxes hit them much harder than they would a larger corporation. Eliminating these costs would allow all businesses, small and large, to focus their attention on producing goods and services, generating wealth for themselves and taxes for the government.

More people would be subject to this tax as well, thus generating more revenue for the government (I keep mentioning more revenue for the government; I know that the government needs to greatly reduce its spending, but that's another argument for another time). Who else would be paying into our tax system? Illegal immigrants and tourists. Think about it, under the current system, neither pay income taxes or Social Security taxes anyway, because illegals don't want to get caught, and tourists don't work here. With the FairTax, they would pay into the system with every purchase they made at the retail level. Some people dislike the idea that foreigners should pay into out system, but I don't and here's why: if they want the privilege of being in this country (whether working illegally or visiting legally), then they should contribute. Don't think for a minute that Americans don't pay Germany their Value Added Tax (VAT) when we buy their products.

The FairTax would also tap the large shadow economy of the United States. Whenever you buy the services of a landscaper, maid, house painter, or hot dog vendor, and you pay them in cash, it is not likely that they are reporting most if not all of that income, and this is known as the shadow economy. That income escapes the clutches of the Federal Government, but is that really fair? If you have to pay taxes on your income as a college professor, but I don't pay taxes on my income as a theoretical house painter, is that fair? The answer is no. Under the FairTax, we both keep all of our income, and pay taxes at the cash register. In his book, which I have cited often in this paper, Neal Boortz cites a 2000 survey claiming that the â€œshadow economy accounts for more than 10 percent if America's GDP. . .â€ (93 *). Maybe that kid who mows your grass doesn't pay an income tax on the money earned by his services, but he'll pay the consumption tax when he buys a new video game at Blockbuster.

Many jobs are sent overseas when American companies take their corporate headquarters and manufacturing plants there. Why would they move away? Under the current tax system, businesses are burdened by the regulations and costs associated with compliance. How much money is overseas? â€œ[T]he 2000 Merrill Lynch & Gemini Consulting study World Wealth Report estimates that one third of he wealth of the world's high-net-worth individuals is held offshore. How much would that be? Try $11 trillion - $11 trillion sucked out of the American economy, all of it immune to the tax obligations you suffer every April 15â€ (Boortz 97). Think about the size of that number. $11 trillion is enough to give 11 million people a million dollars each. This $11 trillion is not in the American economy. This $11 trillion is not producing jobs in this country, nor is it investing in capital or technology in this country.

Let's start putting all of this together, assuming that the IRS has been abolished, and the 16th Amendment has been repealed. People get to take home their whole paycheck every week or two. Their employers can hire more people because they have more money and a higher production possibilities curve. The cost of goods and services stays about the same as before because the 23% consumption tax is about the same as the previous 22% embedded tax (that most people don't even know they were paying). The shadow economy is drastically reduced. Additionally, businesses from overseas begin to come home to this relatively tax-friendly environment, bringing with them even more jobs and capital. Sounding pretty good so far, right? Now for the Grand Finale: The Prebate.

Lyndon B. Johnson launched his War on Poverty in the mid-1960s, and so far, not much has happened. Let's try a new War on Poverty: The FairTax. With this newly implemented FairTax, lower-income workers are already getting to keep their whole paycheck. Most of them never paid any appreciable amount of income taxes, but now they are not having to pay withholding taxes either. They have more money in their pockets. Goods and services cost about the same as before, so already these lower-income workers are doing better than before the FairTax. Let's help them out even further. H.R. 25, or the FairTax, provides for a prebate on the basic necessities of life. A prebate would be a check from the government given monthly to all working Americans to cover their costs of taxes on essential goods and services at the poverty line. That's right, the government would give Americans, and we'll focus on lower income Americans, a check to cover the taxes needed to pay for food and shelter up to the poverty line (Boortz 85).

Think about this for another minute, not only would lower-income Americans have more money in their pockets, but the cost of taxes on goods and services (the bare essentials) up to the poverty line would be eliminated by this prebate. This would essentially lower the prices of these goods needed by lower-income workers. Here's how this all flows out: 22% embedded taxes are eliminated, 23% sales tax is implemented, all Americans receive checks to cover this 23% up to their determined poverty line, lowering the costs yet again. The combination of more income and lower costs would greatly increase the purchasing power of lower-income workers, and would do wonders for the anti-poverty movement.

The FairTax would allow all Americans to keep their whole paycheck, while cutting taxes on goods and services up to the poverty level. The FairTax would eliminate $500 billion of waste every year, putting 5.8 billion hours to better use. The FairTax would tap the purchasing power of both illegal workers as well as perfectly legal tourists. The FairTax would greatly reduce the shadow economy in our country. The FairTax would bring back $11 trillion to our country. The FairTax would utilize all of this to generate more money for the Federal Government. The FairTax would grow the economy and help lower-income Americans. The FairTax is â€œabout making April 15 just another beautiful spring day. . .â€ (Boortz XV). The FairTax Book by Neal Boortz and Congressman John Linder is a must-read, both informative and entertaining.

Bibliography Boortz, Neal & John Linder. The FairTax Book. New York: HarperCollins Publishers, 2005.

* â€œFriedrich Schneider and Dominik H. Enste, â€œShadow Economies: Size, Causes, and Consequences,â€ Journal of Economic Literature, 38 (March 2000), pp. 77-114.â€ Cited in Boortz' The FairTax Book, page 93.

McConnell, Campbell R. & Stanley L. Brue. Economics: Principles, Problems, and Policies. 16th ed. McGraw-Hill/Irwin, 2005. Online. Americans for Fair Taxation. . Online. Tax Foundation. . Online. The White House: President George W. Bush.

The FairTax doesn't change the fundamental nature of the beast. Social Security is and always has been socialistic. Moreover, the FairTax does not change the way benefits are calculated. Benefits have always accrued on the basis of earned income, not unearned income.

No, but you are changing where the money is coming from. Currently, it comes exclusively from wages and salaries - where the benefits are calculated. You want to have saving and investment income taxed and a large portion go to Social Security. Someone with a large portion of their income from savings and investment would pay the same but get less than someone making the same amount through wages or salary.

So, let's see Nightie, you'd rather see all of the funding run ou [sic] for everyone so no one gets any financial help despite the lgal [sic] requirements??? How socialistic of you.

I don't want the funding to run out but how would that be socialistic? You want to take money from people with a lot of investment and savings income and give it to people with less. That's socialistic.

Yes....and that is an absolute necessity to keeping the benefits flowing. No one is willing to tell the truth about the system. They've used disingenous means to keep it afloat for years. We are coming to the end of the line...the point at which the whole ponzi scheme is about to come un-glued. If an annuity salesman did what the Federal Government has done, he'd be locked up as a felon, a thief.

I didn't see any mention of an alternative plan in your post. I repeat, if you have a better idea, I'm all ears.

Certainly he wasn't claiming that (which is what I said), but that robbie hisself said that (which he did). Here are rob's words from #14:

"... The FairTax is built on false premises of a FREE LUNCH ..."

... and that's exactly what was being stated by Sprite518. You guys are such a pathetic joke you can't even lie responsibly (wink, wink).

You seem unable to comprehend that NONE of the definitions you posted (one of which I had already given) perclude the sales tax as being defined either as exclusive or inclusive.

That's the touble with you SQL Squad members. You thing it must be only a single way ... your way. Not one of those 5 definitions says it must be either exclusive or inclusive.

And don't go all "Looey-like" claiming that certain prepositions mean only certain things. That's truly nonsense and won't take you very far. The inclusive rate is the way the tax is defined in the bill and the way the receipt required is defined. Trying to warp that into some sort of "doublespeak" or "doublethink" is indeed doublespeak/think on your part.

Those definitions can mean either thing and you seem to not realize that. Show me where one of the 5 defines the tax as being exclusive (or inclusive) of tax. In fact, it can be either but you merely prefer to consider it only a single way for your own reasons. The FairTax website used it both ways and so trying to make that claim is erroneous also.

Yes....and that is an absolute necessity to keeping the benefits flowing.

So your solution is to take from some to keep the "benefits flowing" to others. Socialism, plain and simple.

You also seem to be ignoring the fact that the FairTax bill requires Social Security benefits to be increased by the amount of the FairTax (they even use the exclusive rate, which they erred in not using it for the FCA). Basically, Social Security payouts are increased by 29.87%. Any extra revenue (and them some) made from broadening the tax base to people not paying into the system is lost by the increased payouts.

(a) i believe i said "commonly accepted definition" -- go poll a thousand people (heck, just do 10 people) and see what they understand "sales tax" to be. it is in my 6th grader's math book: a shirt cost $15. the sales tax is $4.50. what is the sales tax rate? (i'm not making this up)

(b) all of the definitions gave, as part of the definition, what i stated as being commonly accepted -- not one of them gave 'inclusive' as part of the definition. it is not the commonly accepted definiton. there is no nonsense about.

I think I like the "kpp_kpp_kpp_kpp" Tax better (but it sure is a mouthful). As for 'that's life', it was some combination of your own choices and /or affairs beyond your control that put you in that particular circumstance. Those things were also often beyond control of the government (though they might think otherwise sometimes).

Paying taxes on consumption makes no judgement whether it is 'good', 'bad', 'fair', or 'unfair' - nor should it. The "kpp_kpp_kpp_kpp" Tax is just that - a tax to raise revenue for the government - it takes no notice of your social circumstances ... and that's quite a good change from the present system which pretends to be the Mother's Milk of Happenstance throwing funds out willy-nilly. There's nothing 'fair' about that, either.

What is your alternative plan?

None of the alternatives are palatable. The system is insolvent by any standard or creative definition of the word.

The Heritage Foundation Report includes this: "In 2017, when Social Security starts calling for its money back, the Treasury will be able to repay the debt only by collecting that amount in new taxes. In other words, the taxpayers, not some vague government entity, will have to repay the $5.7 trillion to the trust fund to keep the system running until 2041.[11]

In that sense, the Social Security trust fund does not save taxpayers a dime. It is merely an accounting device: a running tally of the amount of the Social Security surplus that Congress has spent and that future taxpayers will have to repay to fund all benefits until 2041. Each year’s Social Security benefits will continue to be funded by current taxpayers. There is no mountain of money waiting to be tapped."

What is your solution?

So your solution is to shut down S/S completely??? Fine idea AFAIC so long as you can get enough of those currently on the dole to agree.

While you're at it, why don't you also trash M/C, too. Getting rid of both would save all kinds of tax money though that, of course, can't be done in a tax bill since it is a spending measure.

Both together would drop the FairTax from 23% down to something in the range of 10% to a bit under 15% (both, of course, are t.i. so you won't need to launch that tirade).

how is paying out social security based on earned income ok when the amount paid into it is not based on earned income? at that point why not just pay out equally like the prebate does? the prebate doesn't factor in earned income and thus gives low income earners a much higher refund rate than high income earners -- if it is ok for families then why not do the same for seniors?

there must be some other way.

go poll a thousand people (heck, just do 10 people)

People naturally use both terms-- inclusive and exclusive. Thus they easily grasp the differences and similarities.

Ask any person what percentage of their income they paid in federal tax and they will give you the tax inclusive percentage. Ask a person how much of their income went to paying taxes under the FairTax and they will give you the tax inclusive percentage.

Ask any person how much tax they paid on the shirt they bought and they'll give you the tax exclusive percentage.

What is your solution?

Cut payouts and cut spending (we've been spending the "trust fund" for too long) and allow people to divert some of their OASI tax into personal accounts. But to divert money into personal accounts, you have to know how much somebody is paying in OASI tax (you wouldn't with the FairTax). We also need to repeal the Medicare drug plan.

I would not tax people who would never see the benefits. That's just further down the road toward socialism.

Ask any person how much tax they paid on the shirt they bought and they'll give you the tax exclusive percentage.

Ask any person how much a 23% sales tax on that shirt would be they will give you the amount using the 23% as an exclusive rate, not inclusive. That's where the deception comes in.

Honesty outlives the lie, spin and deception -- It always has -- It always will.

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