The FairTax would be Fair, untax the “Poor,” and untax Education
The FairTax would provide every household in America with a rebate of sales tax paid on necessities. Thus, The FairTax is progressive and every family is protected from tax on essential goods and services. Because of the planned rebate, those below the poverty line would have a negative effective tax rate and lower middle-income families would enjoy low effective tax rates.
The responsibility of paying taxes to fund our way of life would be fairly distributed. It would, in fact, be much more fairly distributed than the income tax. Wealthy people spend more money than other individuals. The FairTax will tax them on their purchases and as a result, the wealthy pay more in taxes. If, however, they use their money to invest in job creating businesses, or to finance research and development to create new products, (all of which help improve the standard of living of others), those activities would not be taxed. The FairTax is premised on the notion that it is fairer to tax individuals when they consume for themselves above the essentials of life, rather than when they invest in others or contribute to society.
The FairTax would in effect give a supercharged charitable contribution deduction because people would be able to give to their favorite charity free of any income tax, payroll tax or sales tax. The charitable deduction today allows people to make their contributions with pre income tax dollars, but after payroll tax dollars. For the three-quarters of Americans who do not itemize, most must today earn $155 to give $100 to their favorite charity or to their place of worship. [1] Under The FairTax, they must earn only $100 to give $100, since under The FairTax what you earn is what you keep and charitable contributions are not taxed.
Education is one of the keys (along with savings and hard work) to an improved standard of living. That certainly was true in my case. I was the first person in my family to attend and graduate from college. It took a lot of hard work, and a lot of sacrifice by my parents. The FairTax is education friendly and is dramatically more supportive of education than current law. The FairTax embodies the principle that investments in people (human capital) and investments in things (physical capital) should be treated comparably. The current tax system, in stark contrast, treats educational expenditures very unfavorably.
Education is the best means for the vast majority of people to improve their economic position. It is the most reliable means people have to invest in themselves and improve their earning potential. Yet the tax system today punishes people who invest in education, virtually doubling its cost. Only a national sales tax on consumption would remove this impediment to upward mobility. No other tax plan would do so.[2]
Today, to pay $10,000 in college or private school tuition, a typical middle-class American must earn $15,540 based only on federal income taxes and the employee payroll tax.[3] The amount one must earn to pay the $10,000 is really more like $20,120 once employer and state income taxes are taken into account.[4]
The FairTax would not tax education expenditures. Education would be paid for with pre-tax dollars. This is the equivalent of making educational expenses deductible against both the income tax and payroll taxes today. Thus, a family would need to earn $10,000 to pay $10,000 in tuition, making education much more affordable (not considering state income taxes on education). The FairTax would make education about half as expensive to American families compared to today.
The FairTax would improve upward mobility but no longer punish work, savings, investments or education. It would better enable people to improve their lives. It would no longer hold people back.
The FairTax would be Simple The FairTax is a simple tax. Individuals who are not in business would have absolutely no compliance burden, nor would they be subject to the discretionary interpretation of the current convoluted tax code. As for businesses, it puts many fewer administrative burdens on businesses. In fact, filling out The FairTax tax return is comparable to filling out line one (gross revenue) of an income tax return. There would be no more alternative minimum tax, no more depreciation schedules, no more complex employee benefit rules, no more complex qualified account and pension rules, no more complex income sourcing and expense allocation rules, no more foreign tax credit, no more complex rules governing corporate acquisitions, divisions and other reorganizations, no more uniform capitalization requirements, no more complex tax inventory accounting rules, no more income and payroll tax withholding and the list goes on. Businesses would simply need to keep track of how much they sold to consumers.
Compliance costs would, therefore, fall under The FairTax. Today, according to the Tax Foundation, we spend about $250 billion each year filling out forms, hiring tax lawyers, accountants, benefits consultants, collecting information needed only for tax purposes and the like. These unnecessary costs amount to about $850 for every man, woman and child in America. To the extent these costs are incurred by businesses, they must be recovered and consequentlyare embedded in the cost of everything we buy. The money we spend on unnecessary compliance costs is money we might as well burn for all of the good it does us. The Tax Foundation has estimated that compliance costs would drop by about 90 percent under a national sales tax.