As tax day (April 15) approaches, what better time to examine a simple and increasingly popular alternative to the current convoluted system of federal income taxes––that alternative known as the FairTax.
The FairTax is the official name of a proposed bill in Congress that would replace all federal income taxes with a national sales tax.
Presented by Georgia Congressman John Linder in 2005, the legislation known as H.R. 25 is currently sitting on the floor of the House of Representatives, awaiting enough signatures to co-sponsor a vote to enact it into law.
Discussion of the FairTax has grown considerably among both politicians and the general public in recent years. Perhaps the most high-profile proponent of the FairTax lately is former 2008 presidential candidate Mike Huckabee, who endorsed the proposal as part of his campaign platform.
The main verifiable benefit of the FairTax is its simplicity. It would eliminate the IRS and tens of thousands of pages of tax regulations.
If you want a mere explanation of what the FairTax is, DO NOT read The FairTax Book, written by Linder and radio talk-show host Neal Boortz. About three pages of the book are devoted to explaining the factual details of the FairTax, with another 195 pages of speculation comprising a tedious, repetitive and heavily biased advertisement for the proposal. (The plan’s very name is a marketing ploy. Who could be opposed to a fair tax?)
The FairTax is so simple that it can be explained in the short space occupied by this editorial. So here goes:
It is a twenty-three percent federal sales tax on new retail goods and services, which would replace all current federal income taxes. Individual income taxes, the alternative minimum tax, corporate and business income taxes, the capital gains tax, Social Security and Medicare taxes, self-employment taxes, estate and gift taxes––all of these would no longer exist.
The new sales tax would be “revenue neutral.” All the revenue currently collected by existing federal taxes would be collected by the single FairTax, according to the book’s authors who cite economic studies which have found 23 percent to be an adequate rate.
In order to gain the revenue needed to run the federal government, many items that are not taxed now would be subject to the FairTax. These include doctor’s and attorney’s services, rent, haircuts, and insurance premiums.
And only NEW retail items would be taxed. Buyers of used cars or existing homes would not pay the 23 percent sales tax. Store owners would not be taxed on wholesale items they purchase to stock their shelves.
“The key to fairness,” explain Boortz and Linder, is the FairTax “prebate.” This advance rebate check (to be paid by the federal government to all households each year, regardless of income) is to partially compensate families for the 23 percent sales tax they will be paying. The prebate amount for families at or below the poverty level is designed to pay them back in full for the federal sales tax they will be paying. The idea is to ensure that poor families are not spending all their money on taxes for food, medicine, clothing and shelter.
And that’s basically it. The FairTax would not affect existing state, city and county taxes. You would still have to pay those income, sales and property taxes on top of the federal FairTax. But remember, you would be taking home one hundred percent of your wages and salaries, rather than the 75 percent you take home now after federal taxes are withheld.
The authors do not claim the FairTax will lower your taxes, but they do paint a picture of an American economic paradise for everyone that would never end after passage of the FairTax, presenting this wild speculation as absolute fact.
While that is unlikely, what is enticing is the possibility of never again spending countless hours incorrectly filling out tax returns, and finally knowing exactly how much tax we are paying to a system that would be completely transparent. At the same time, anything that simple demands caution and thorough discussion before implementation.
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