Fair Tax 101

[stebo0728]

Ok so I have been itching to do this post for a few weeks now, and I finally got enough determination to sit down and get it done. Todays subject, The Fair Tax, otherwise knows and The National Retail Sales Tax.

The bill before Congress can be found here HR25, and the bill before the Senate here S 296.

The purpose of the plan is to create a revenue neutral change in the way we are taxed in America. The Fair tax seeks to replace income and payroll taxes with a simple retail sales tax, levied on purchases of any new products or services. The plan also calls for the repeal of the 16th Amendment. The bill does not actually repeal the 16th Amendment, but it is structured as to only take effect upon the repeal of the 16th Amendment. This ensures that if it is passed, we will not be able to have both plans in place concurrently.

The estimated revenue neutral percentage is 23%. This is an inclusive figure, not exclusive. Why is this important to note? One of the major arguments against the Fair Tax plan is "23% is a lie, its really a 34% tax, which is more than the income tax!" Lets explore this for a moment. In order to compare two items, of any nature, they have to be compared on like terms. Therefore we have to either calculate both taxes inclusively, or calculate both exclusively. Whats the difference? Lets take a $1 loaf of bread example. With the Fair tax in place, you will see the loaf of bread on the shelf, with a $1 label. You will take it to the register, and hand the cashier a $1 bill, and be on your way. Therefore 23% of that $1 is the Fair Tax, which is $0.23. This means the cost of the bread was actually only $0.67 right? This type of calculation is referred to as inclusive. Now should you then say well the bread cost is $0.67 and the tax amount is $0.23, then thats a 34% markup tax. We currently calculate sales tax this way so it makes sense to want to think of it this way, but, the income tax, which is what we are attempting to replace, is calculated as an inclusive tax. You dont take your income, and mark it up to establish a tax rate, your tax is withheld from what you have already earned. So for intrest sake, lets calculate the income tax exclusively, the same way Fair Tax sceptics calculate the Fair Tax, and see what we get. Lets take the example of a person who grosses $3000 a month. And lets say this person has income tax and payroll tax withheld in the amount of $750. This allows a take home net pay of $2250. Calculated inclusively as normal, this is 25% of the persons income. However, if you were to calculate this exclusively, its 33%. Therefore, in order to keep the Fair Tax on the same terms as the income tax, it is calculated the same way, inclusively, and is estimated to be 23%.

Another popular argument against the Fair Tax, again involves a $1 loaf of bread. The argument is that on day one of the Fair Tax, a loaf of bread that once cost $1 will now cost $1.23. Supporters are labeled as "wanting to increase the price of your food!" Lets explore this. It is true that one day one, the Fair Tax will increase the price of the $1 loaf to $1.23. However, lets explore what other forces will come into play in the short term. Where does that loaf of bread come from? A bakery? Well bakeries have to employ people to produce their product, and with the Fair Tax removing corporate payroll taxes, suddenly there is some wiggle room, some extra profit. Where does the bakery get the flour, and butter, and milk, and whatever else it needs to bake the bread? Those suppliers also lose their corporate payroll taxes, again providing some extra profit. Will these companies simply decide to dance around and be happy they have extra profit? Sure, many will at first, its human nature. However, it will not take long for one company to realize it could have a competitive edge by reducing its pricing based on their reduced tax burden. Corporate espionage quickly causes competition to lower their pricing to retain business, and before you know it, prices have reduced all the way down to the end user. Research indicates that this decrease could be as much as 20-21%. Thereby causing the Fair Tax in the end to have only had a 2-3% effect on the cost of goods. "BUT THAT WILL NEVER HAPPEN, CORPORATIONS ARE GREEDY!" you say? How about some evidence to show just how this works. It has happened in the past, and it only took less than a week! In 1995 congress allowed a tax on airfare to lapse. At first airlines absorbed this extra profit, but in only days, competitive forces had the fares down to near the level of the orginal fare minus the missing tax.

A question I get alot when discussing this plan is, "what about my pension that I have already payed taxes on, does that mean I will be double taxed?" This is actually a quite fair question, and unfortunately the answer is yes, you will be double taxed. Thats to say you will have to pay the retail sales tax just like everyone else with this pension money. However, the upside of this is in the previous point. Even though you will have to pay this tax, because of the removal of embedded taxes in your goods means the actual increase of your purchases will be nominal. It will be nearly business as usual for you. The next point will also aid you in maintaining financial integrity.

Many who discuss the Fair Tax tend to gloss over this next aspect of the plan. The Prebate. The Fair Tax seeks to remove the tax burden for necessities of life. To do this, a monthly "prebate" will be distributed to every household. This prebate takes the national poverty level, calculates what a household at that level will have to pay in Fair Tax payments, and "preimburses" every household. Not just poverty households though, EVERY household. From the cardboard shack family, to Donald Trump. Heres how this works. Lets say a household of 4 will monthly spend $500 a month for necessities. Well $115 of this will be Fair Tax revenue, therfore, a prebate check in the amount of $115 will be sent to each and every American household, thereby removing their tax burden on NECESSITIES, food, toiletries, shirt on your back clothing. Then, wealthier households who live more lavishly, spending over and above the necessity level, will pay the Fair Tax on these excessive purchases. Another common argument against the Fair Tax, is that it will be damning for poor families. This argument is either igrorant of, or disregards the prebate. The prebate aspect actually causes the poorest families to come out on top.

Alright so lets discuss some other positive outcomes of the Fair Tax. For one, the cost of taxation compliance for businesses will drastically reduce. Large corporations have entire floors, or entire buildings dedicated to constant attention to the company's taxation compliance. Accountants, lawyers, and others, all stamerring around trying to make sense of the volumes and volumes of tax code. The Fair Tax will greatly reduce, if not completely irradicate this. Again, sudden surge in profit, and again, where will this profit go? Sure in the pockets of the executives, for a short while, but once again competition will act to reduce the end prices by an amount near or equal to these compliance costs. Another win for the consumer. Secondly, black market and illegal resident revenue is currently completely under taxation radar. The Fair Tax will correct this. Everyone needs groceries and clothes, even Pedro, and the drug dealers. Heres the thing though, with Pedro, his family is undocumented. The government has no way of knowing how to send them their prebate right? So Fair Tax collected from them stays in the system. Thirdly, the Fair Tax applies ONLY to new purchases. That means should you purchase a used car, or even a used home, then that purchase will have no tax burden, other than any State or local sales taxes of course. This will result in a rise in used goods sales.

Next, international businesses were presented with the Fair Tax plan, and asked what their next business decision would be if the Fair Tax were enacted in America. Overwhelming the response was to open their next business venture in the US. A few had a different response, they decided they would move their headquarters to the US! All the money that is sitting in offshore accounts to escape the heavy taxation currently imposed by the US, will begin to be moved back, and re-invested into our economy.One would have to hind under a table to not have a job find them.

Alright so all this sounds nice, but why a consumption tax? Simple, our economy is a capitalist economy. The fairest way to levy taxation, so that the individual is in more control of how much tax they pay, is to tax consumption. Additionally, the Fair tax that you pay will print right out for all to see on your sales receipt. What better way to keep tabs on how much tax you are actually paying.

There is much more to be said about the Fair Tax, but the post could slowly become a book. Ill be happy to answer, or research any questions regarding the Fair Tax. Radio talk show host Neal Boortz, and congressman John Linder have teamed up and released 2 good books on the plan. The Fair Tax Book, and Fair Tax: The Truth Answering the Critics. These are both very good reads.

Additional information can be found at http://www.fairtax.org

[WDRacing]

I hate math...I put math on the same suck scale as diarrhea. That said, I have to believe the goal of the Fed Gov will be to increase their revenue, it will never be to decrease it. So any new "methods" they come up with to tax the people are simply going to take more money from the people who have it so the people without can catch a break. That's the way I look at this type of thing.

I can't read all of your post without getting a nose bleed.

[stebo0728]

Well if you research the plan you find that it was in fact developed by civilians, the plan was then codified into a bill and endorsed by a few Congressmen. The importance is to see that government planning is not the source of the plan. In addition, the plan required a complete 2/3 vote in order to increase the tax rate.

[WDRacing]

If the "Fair Tax" doesn't increase revenue I doubt it will ever pass.

[stebo0728]

It never will pass as long as attitudes like that prevail ... the ground swell for it is it increasing every day ... a large number of Tea Party members are supporters ... Huckabee made it part of his presidential campaign platform. It is admittedly a long shot, but I refuse to concede that it is impossible. Colonists believed the same thing about independence, many didnt even want independence, yet it happened, so with the American people, anything is possible (except plugging oil leaks of course). Lets not discuss whether or not it will pass, lets discuss whether or not it is a good plan.

[WDRacing]

If it means paying less taxes it's a good idea. I simply have ZERO faith in our Gov to make decisions based on whats best for the people of this country. There is corruption and greed at all levels from small townships to the White House. Until our Gov as a whole is restructured there will be no major changes for the betterment of the people. All we'll continue to see is more BS.

No one can deny Congress is broken. The voting system we have in place isn't going to fix it either, the person with the most $$ and party backing will always win. In the end we're always stuck with garbage choices that do nothing but perpetuate an already failed Gov.

I don't mean to hi-jack your thread, just saying I can't get excited about something that may be a good thing for the people because unless it's good for the people in power then it will never come to be. I'm in a negative mood today

[stebo0728]

Its not really about lowering our taxes, that will be the result for some, but its about leveling the tax field back out, and giving the Americans control of how much they pay based on how many goods and services they purchase. Most revolts, revolutions, coups, and the like have centered around taxation disagreements. What better way to revolutionize our own government than by repairing what matters most to people: How much money they have. Other things will need repair along the way, and perhaps this is just the guiding light we need to get the ball rolling.

[WDRacing]

I can buy into that.

[stebo0728]

Good to hear If you like, go to the website I linked and sign up for updates on the progress of the bills. You can also sign the "petition" granted its a petition with no teeth but it still lets people know that more and more people are signing on for this.

[smockers83]

If the "Fair Tax" doesn't increase revenue I doubt it will ever pass.

It may not exactly increase gross revenue, but it states that it is revenue neutral. It also calls for the demise of the IRS. With the savings there and the reduced revenues, it would be like revenues remained the same. However, I'm only assuming this as I haven't read the minutia of the proposal. But any tax code in current tradition doesn't guarantee increased revenue. If the government increases the tax rates, a lot of things in the economy could happen and tax evasion that would decrease revenues from before.