Many people have called for abolishing the income tax and IRS. That’s a worthy goal with which most Americans can agree, but only if there is a workable plan that would allow that to happen without economic upheaval. The only proposal, thus far presented, that would achieve that goal is one that limits the political power of members of Congress and reduces the influence of lobbyists. As a result, the power brokers have been working overtime to keep that proposal from reaching the floor of either house.
The tax plan are we talking about only income tax replacement plan ever created solely by economists, NOT politicians. Instead of politicians directing tax writers to create a particular type of plan (income tax, VAT, sales tax, etc.), the economists were given a free hand and only told to create the “best” plan. That plan now takes the form of “H.R.25 - FAIRtax Act of 2019” and is currently sitting in the Ways & Means Committee, where the power brokers have been working to keep it bottle up. The only thing that is needed to get the FAIRtax to a floor vote, where it has significant support, is a few more members of Congress, who are dedicated to making that vote happen.
So, what is the FAIRtax and what makes it “fair”?
In simplest terms, the FAIRtax is a heavily researched proposal that would abolish the income tax and IRS, in favor of a progressive national retail sales tax, collected only at the cash register and only on new retail goods and services.
What makes the FAIRtax “fair” is that every American would pay the exact same percentage of tax at the cash register and every American family would receive the exact same amount of monthly rebate, based on family size. It is the rebate that would make the FAIRtax progressive in nature. This rebate serves much the same function as does the personal exemption, under the income tax. Both are aimed at protecting those living below the poverty line. But only the FAIRtax rebate can actually achieve that aim. That’s because of the widely varying effect of embedded income taxes in the price of every item purchased under an income tax, distorting the effect of the personal exemption. Under the FAIRtax, there would be no hidden taxes embedded in the price of purchased goods and services.
Moreover, the FAIRtax rebate would be paid out in advance of the tax being paid at the cash register, which leads to it being referred to as a “prebate”. So, instead of the government sitting on your withholding and earning interest on your money for up to a year, it is you, the taxpayer, who would be earning interest on the prebate each month until such time as you make enough retail purchases to pay that much tax.
So, why a sales tax?
There is one truism about all taxes that income tax, flat tax, and VAT supporters want us to forget.
Only People Pay Tax!
Politicians tell us things like, “I’ll lower your taxes and raise taxes on the corporations.” The spin is that someone else will be paying tax for you. But that’s not the way it works.
To corporations, any corporate income tax is just another cost of doing business. So just like other costs of doing business; the costs of corporate income taxes are just added into the price of the products that the consumer buys, along with a profit margin. So corporations don’t pay tax. They just pass them on to the consumer. In the end, “Only people pay tax.”
A sales tax is therefore, the only form of taxation that is 100% visible. The FAIRtax is collected only at the point of final retail sale of new products or services and 100% of the tax paid shows up on the sales receipt. There are no shadowy taxes passed on from producers or any otherwise hidden taxes.
It gets better! A sales tax is automatically border adjustable. This means that, unlike an income tax which not only is not naturally border adjustable (but under WTO rules) may not be made to be border adjustable. So, under the FAIRtax, US manufactured products would become far more competitive in both foreign and domestic markets. If you think our stock market is soaring now, watch it fly under FAIRtax. Are you happy with the new manufacturing taking place here at home? Wait till we are the only nation in the world that does not tax producers and watch foreign manufacturers rush to build new factories here.
Why not a flat income tax?
History has proven that a flat income tax would be nothing more than a temporary placebo. The Reagan tax cuts proved that a flat tax will not remain flat. Reagan reduced the number of tax brackets from 16, topping out at 50%, to only two brackets, topping out at 28%. But within the first congressional term after he left office, one bracket was added back in and by 1993, they were back up to five brackets. We are now at seven brackets. The point is this, as long as there is an income tax, a flat tax won’t stay flat.
Most of all, as long as income is taxed, an IRS is required. But under the FAIRtax, there would be no need for an IRS. The FAIRtax would be collected by retail businesses. Those businesses would remit taxes to their respective states. (Note that 45 states already collect sales taxes, so this would create very little new overhead.) The states would then remit collected taxes to the US Treasury Department. So following the flow of sales tax, the states would audit a portion of the retail businesses in their jurisdiction, as they already do in 45 states. The US Treasury would audit only the states - the only entities who remit taxes to them. But the best part is that nobody would audit individual taxpayers. No sales tax administration in the USA does or ever has tried to audit individual consumers. In fact, it would be next to impossible to do so.
What about tax evasion?
Historically, roughly 90% of sales tax evasion, across the states that collect sales taxes, originates from businesses that provide just 10% of sales tax revenue. This means that even the worst-case sales tax evasion would be far less than the current 17% evasion rate, under the income tax. Furthermore, unlike income tax evasion, that takes just one person to be successful, sales tax evasion requires the co-operation of two participants, making it much easier to detect. Other factors lead to the conclusion that, under the FAIRtax, sales tax evasion would be somewhere in the 5% range or less than a third of the evasion rate under the income tax.
The FAIRtax is a major Win for you the tax payer; while limiting the power of lobbyists, the tax/spend wasters of your tax dollars, and especially those that want to maintain power over your economic freedom.
What are we talking about! An additional benefit of the FAIRtax is; even those that are gaining money via less than legal means have to pay at the point of purchase. So everyone pays their "fair share".