Fair Tax and the abolishment of the IRS

[johnnyapollo]

A couple of thoughts I wanted to share with the pending tax date. I was introduced to the idea of "flat tax" many years ago and thought that in general it was a good idea (in principle at least), however I had the same misgivings about it (impact on the poor, etc) as opponents. I was familiar with the FairTax idea but didn't really know the particulars - I just thought it was a rehash of the flat tax idea that had been floating around for a while. I'm currently reading "The FlatTax Book" and it's completely eliminated my misgivings as it's very different from my assumptions. I think everyone should read this book or at least research it, as there are many important ideas presented by the proposal.

Before going on, let me say that the largest arguement I've heard against FairTax has been the burden on the poor - there is an estimated 22% consumption tax on all goods and services that at the face of things seems to kill the deal (it's often used as the arguement against it). What isn't provided is the opposite arguement - Woud you pay 22% on the cost of goods you buy, if you didn't have about 30% of your salary withheld? With the elimination of the Federal Income tax, you get all your money - withholding goes away. So at the very least, there's a savings from what you make compared to what you buy. Also, the plan eliminates the following: Individual Income Tax, Alternative Minimum Tax, Corporate and Business Income Tax, Capital Gains Tax, Social Security Taxes, Medicare Taxes, Self Employment Tax, Estate Tax, and Gift Tax, all without lessoning the income the government currently attains via taxation (in other words, no change in the actual amount the US government collects so it's current budgetary programs would not be affected).

Besides which, everything is simplified and the costs of goods should decrease as all the embedded taxes are removed. I know I'm probably going to get a lot of responses as my statements so far are simplified, so bring them on!

-- John

[etlsport]

i dunno, i dont know much about the subject since all i know is what i read in your post.. but raising the price of items with higher tax but offsetting it with putting more money in the pocket of everyone sounds like inflation on fast forward to me, but I might not be understanding completely

[johnnyapollo]

I don't understand that comment - inflation is caused by there being more money in circulation that there are funds behind it - basically the dollar is worth less. How can having your money up front instead of having it withdrawn from your check cause there to be more inflation?

-- John

[etlsport]

oh, no I dont mean that it actually causes inflation, just a similar effect when it comes to buying and spending. The effect of inflation the consumer sees is increased prices, which doesn't much matter because he/she has more money in their pocket. 10 years ago, say a can of soup cost $0.50 and today it costs $1.00, but that doesnt matter much because the average salary in the country has gone up so people have more money in their pocket to spend on it. to me it seems that raising the price of goods to the consumer by adding an additional 18-20% in taxes but offsetting that by giving the consumer 30% more money in their pocket is similar

i dunno if im making sense, like i said I'm not familiar with the idea (and also dont have more than a basic understanding of the economy) that was just the first thing that came to mind. If im way off base i apologize and would love clarification

[johnnyapollo]

The FairTax accessed on goods is built into the price, sort of like VAT in Europe. So when you buy something that has a $1 price sticker, you'd be paying that $1 (plus any local taxes if there are any - the good news is that much of that local tax will probably go away as the built in tax for a manufactured good will no longer exist - local taxes should go down). Only the cost of new goods and services is taxed - used goods (including older houses) aren't taxed. Since you're only taxed on what you spend, it's up to you to decide how much you pay - higher consumption = higher taxes spent. Also, the plan provides a federal monthly prebate - basically a check from the government, to off-set basics like food (the more dependents you have the the less you make, the larger the prebate - it ensures that the poor aren't badly hit by the system). The prebate is only given to those that are registered with real jobs (people with social security numbers) so illegals and those working in the "shadow economy" (like criminals) would be paying taxes every time they purchase something - as would visitors to our country.

-- John

[tom4bren]

"Since you're only taxed on what you spend, it's up to you to decide how much you pay - higher consumption = higher taxes"

Doesn't this mean that the poor will be paying a proportionally larger burden of taxation since they spend more of their income than the rich?

[LittleBeast]

Isn't this what Huckabee was wanting to do? Man I wish he would've gotten the republican nomination

[johnnyapollo]

Doesn't this mean that the poor will be paying a proportionally larger burden of taxation since they spend more of their income than the rich?

The poor will be receiving more of their income since there isn't any withholding. Also there is a prebate based on a current index of what it takes to live - this is sent out monthly to cover the cost of basics like food and clothing (it basically provides a refund for any expenditures for items in value up to the current poverty level in taxes used in withholding). It actually has an opposite effect for the poor as they will have more money to spend for necessities with no adverse effect on those below poverty level.

To expand on this futher, it's possible for someone very wealthy to live in the US tax free (they can use off-shore accounts to shelter money from taxation and prevent the loss due to the death tax; they also can invest the bulk of their money in holdings and get paid in tax-free dividends - essentially living the life of luxury without creating any income or paying any taxes) - by moving to a consumption tax the very wealthy will have to pay for anything that they buy - now paying taxes where previously they didn't. And futher, those who are living off of stocks and bonds aren't paying into medicare or social security - all of us who get that paycheck are essentially carrying the burden for everyone who doesn't).

The tax burden gets spread across everyone spending money and doesn't rely on the smaller percentage of workers currently taxed. It creates a dollar-for-dollar federal revenue neutrality that is currently missing and entirely abused by many that "game" the system. The more I look into this, the smarter it becomes.

-- John

[tom4bren]

Johnny - Sold. Make it happen:)

One more question tho - What about people living in the US with foreign income (diplomats & such). Will they get some kind of exemption from sales tax? What about religious & educational institutions, will they still get exemtions?

[Ldub]

The poor will be receiving more of their income since there isn't any withholding. Also there is a prebate based on a current index of what it takes to live - this is sent out monthly to cover the cost of basics like food and clothing (it basically provides a refund for any expenditures for items in value up to the current poverty level in taxes used in withholding). It actually has an opposite effect for the poor as they will have more money to spend for necessities with no adverse effect on those below poverty level.

To expand on this futher, it's possible for someone very wealthy to live in the US tax free (they can use off-shore accounts to shelter money from taxation and prevent the loss due to the death tax; they also can invest the bulk of their money in holdings and get paid in tax-free dividends - essentially living the life of luxury without creating any income or paying any taxes) - by moving to a consumption tax the very wealthy will have to pay for anything that they buy - now paying taxes where previously they didn't. And futher, those who are living off of stocks and bonds aren't paying into medicare or social security - all of us who get that paycheck are essentially carrying the burden for everyone who doesn't).

The tax burden gets spread across everyone spending money and doesn't rely on the smaller percentage of workers currently taxed. It creates a dollar-for-dollar federal revenue neutrality that is currently missing and entirely abused by many that "game" the system. The more I look into this, the smarter it becomes.

-- John

This all sounds good, but what are we gonna do with all the out of work tax people? (H&R Block, corporate tax attorneys, etc.)
Don't know if I'll see it in my lifetime, but I can always hope.:rolleyesg

[johnnyapollo]

Anyone who purchases would be subject to the consumption tax - no exemptions - even the govenment would be subject so there aren't any exceptions. Of course it's only on new goods at retail - so used items (like used cars) would not be taxed. Items/materials bought to manufacture goods would not be taxed (they aren't now anyway). Also, all services would be taxed (even stuff like medical care which isn't currently taxed) and yes, churches and charitable institutions would have to pay the same consumption tax as everyone else on new goods at retail. What makes this work is that everyone pays - when there are exceptions it provides a soapbox for K Street lobbiest - one of the problems with our current tax codes and system (and they have been the most vocal against it, as to be expected).

The IRS will mostly be abolished - however there is a need to manage the prebate and social security eligibilities (the same monies will need to be calculated based on income and set aside - the difference is that instead of paying a tax towards it, the funds would come from the general tax budget) so many will still have jobs. H&R Block and those other companies will either adapt to a new business or go away, but do you really care? Most accountants will tell you that they'd rather be spending their time at other tasks besides figuring out the complicated tax codes. I don't see a negative there.

-- John

[johnnyapollo]

And another comment - this also addresses the issue with Social Security and Medicare being in so much trouble - it doesn't immediately fix either (meaning they both need to be reformed), but it does remove the unfair tax burden on the percentage of working US people, something politicians are scared to touch as they are both "sacred cows" by sharing the burden across all consumers (US citizens, workers or not).

-- John