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.

"You want to take money from people with a lot of investment and savings income and give it to people with less."

Another misleading SQL statement on this thread - how many does that make?

FairTaxers want to tax Americans on what they CONSUME (regardless of the source of the funds used for that consumption), rather than on their income. Those with high levels of investment and savings income can elect to pay no taxes on a net basis if they so choose. To the extent they CHOOSE to consume at higher levels, they will pay for that.

I never did see a response to Conservative Goddess's question a few posts ago about what YOUR plan to address Social Security's problems is. But I'm not holding my breath.

I know that YOU said 'commonly accepted' definition meant but that merely reflects whatever current practice might be. It is not reflected in any way in the dictionary definitions which are certainly open to mean either t.i. OR t.e.

Merely because you prefer one over the other to try to make your point does not mean the other is wrong by any means. Your 6th grade example (if the textbook were being truthful) would have taught the example you cite from it was either 30% or 23% debpending of how the tax was calculated. The AMOUNT of tax remains the same.

The thing being sold could be priced either way and t.i. is used in some places so the definitions are still just fine in that event. Your pigheaded (sorry Mom) insistence notwithstanding, either way is as correct as the other and either describes the same amount. You are certainly welcome to use only one if desired but spare us this idiotic argument that so many Squirrels hang their bushy tails on and stop the accusitions of dishonesty, intent to mislead, etc.

None of your 5 definitions gave any sort of indication at all of what the commonly accepted practice might be and since that can change with time you see those definitions will still be just fine when the "kpp_kpp_kpp_kpp" Tax becomes law. Won't need a cent of tax money to change them.

Well, no, we 'agreed' on no such thing. I merely did not take issue with you on the point. That does not mean I couldn't.

I would say that the word is descriptive ... but subjective ...??? Seems like a great big off-topic belch to me.

"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."

Cut payouts? You mean Social Security benefits? So you want to tell someone who has been paying into SS all their working lives that the federal government isn't going to live up to its part of the bargain? And just how do you expect to get that through politically?

As for cutting spending, wouldn't we all like to do that? The shortfall in SS and Medicare has been estimated at over $50 trillion for the next 75 years. So you are proposing to offset a significant portion of that with benefit and spending cuts?

Why go to all that trouble? With the FairTax investments of all types are not taxed so everyone has the ability to have their OASI "personal account" by just doing away with S/S as you suggested earlier. Certainly the government "allowing" citizens to divert (some of the governments money) gives exactly the wrong connotation AFAIC. It's my money, not the government's.

With the FairTax as the law, we'll probably be able to reduce S/S outflow, say, 10% a year until it is no more. People will do just fine without it most likely by building up heir savings and investments. It's be a great incentive.

M/C too and that would take care of he drug benes, too.

FairTaxers want to tax Americans on what they CONSUME (regardless of the source of the funds used for that consumption), rather than on their income. Those with high levels of investment and savings income can elect to pay no taxes on a net basis if they so choose. To the extent they CHOOSE to consume at higher levels, they will pay for that.

Riiiight. They can choose not to spend their investment income and avoid being taxed. Why did they choose to earn it in the first place? To spend it. This whole "voluntary tax" is just another steaming pile of dung from the FairTaxers.

I agree with you in principle. I think it will be a really hard political sell. Even 'conservative' Rick Santorum is backing away from the 'third rail of politics.'

Please see: http://thomas.loc.gov and type S.1750 into the dialog box. That should bring up Tricky Ricky's bill to "Guarantee" Socialist Insecurity payments to all born before 1950.

Given that one of the President's Social Security Bulldogs is proposing a guarantee for benefits....I don't see cutting benefits as a real option.

I would gladly renounce all claims to benefits earned in exchange for the freedom to invest all future SS taxes on my own. I would also do just about anything to ransom my children's freedom from this ponzi scheme. I just don't see it happening. The productive sector will always be saddled with the bills of the unproductive sector....and yes, that's socialism. Until we change entitlement mentality...we'll be stuck with leeches and hosts.

Cut payouts? You mean Social Security benefits? So you want to tell someone who has been paying into SS all their working lives that the federal government isn't going to live up to its part of the bargain?

These are the same people who have been receiving the benefits of deficit spending for the last 40+ years. They've been getting more than they paid for a long time. So they will have to get less than they paid for at some point. Did they think the bill would never come due?

As for cutting spending, wouldn't we all like to do that? The shortfall in SS and Medicare has been estimated at over $50 trillion for the next 75 years. So you are proposing to offset a significant portion of that with benefit and spending cuts?

You either cut spending or raise taxes. You seem to favor increasing taxes.

The unstated assumption is that higher earners spent more...and paid more. I agree that it's not fair....but the sad fact of life is that unpalatable choices must be made. If we rely only on the productive sector to fund the benefits of the unproductive sector, we'll kill the productive sector.....like a leech bleeding it's host dry.

Please read the Heritage Foundation piece. It's really quite a good summary. Here's the link: http://www.heritage.org/Research/Budget/bg1897.cfm

"but it still wants to pay out soc sec benefits based on earned income."

Sure, the disconnect is that the FairTax is a tax reform measure, not an overall reform of every government program. Therefore, your statement that "it" wants to pay out Social Security benefits is misleading at the very least if by "it" you mean FairTax supporters.

Sad??? What's sad is the fact that you (and many others) have no plan at all but merely, like sheep, sit there and take it being drained of your wealth.

You'd better get off your butt and do something productive, big boy instead of just strugling to retain the present system.

"You either cut spending or raise taxes. You seem to favor increasing taxes."

I favor increasing the rate of economic growth so that more taxes are collected. I favor expanding the base so that tax collections benefit as much as possible from that expansion. If that is what you mean by "increasing taxes", then I plead guilty.

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