The FairTax Plan
First of all, in case anyone’s looking for it, here’s the official details on the IRS’ reasons for making April 17th the national deadline for filing your personal income taxes this year. It’s certainly also a good time to be thinking about how we could improve the system, something we all agree needs to be done, but can’t seem to agree how.
Of course, when you really get down to details, I’m not sure any of us quite knows quite what kind of tax system we’d prefer, but there are some basic qualities we could probably agree on. We need a system that no longer penalizes American business competitiveness, we need a simpler system (need I say more?), and we need a system that encourages - or at least doesn’t penalize - savings and various forms of investment and capital formation.
While a lot of conservatives might not agree on this last point, I think we also need a system that is modestly progressive, i.e. that gives a break to the poorest members of society. Even if you don’t agree with this philosophically, there is certainly a public interest in seeing these folks succeed financially, rather than linger on welfare rolls.
I don’t know all the specifics of the FairTax Plan, but this morning Houston City Councilman Michael Berry had Americans for Fair Taxation’s David C. Polyansky on, discussing this proposal. Here’s a summary taken from their website:
“The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.
The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.
The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. …”
In other words, the FairTax plan would be based on consumption, not income or savings, so if you made a lot of money but lived frugally, saving and investing what you made - and so creating jobs and wealth - then you wouldn’t get taxed that badly. On the other hand, if you wanted to live like the robber barons, then you’d pay considerable tax - 23% (plus state sales tax, I presume) - but you wouldn’t have to hire an army of accountants and lawyers, nor would you need to worry about estate taxes. That last part alone would probably save wealthy folks enough to where many would gladly pay the 23% on consumption in order to have more financial flexibility.
Of course, I don’t know how they come up with these numbers, but that 23% would apparently include all Social Security and Medicare taxes, and since it’s a straight number, it would be easy to predict the tax impact of any transaction and, like sales taxes, the amount would apparently only be levied on the final purchase, so there wouldn’t be a bunch of “built-in” taxes that add to the cost of goods. While the combined federal and state tax would be about 30%, twice the European VAT, if it had a downward impact on inflation - and interest rates - it might prove a bargain for these reasons as well, without having the regressive characteristics for which value-added taxes have been criticized.
The FairTax Plan, which currently has about 60 mostly Republican co-sponsors in Congress, including Texas Sen. John Cornyn, is reportedly most strongly opposed by Washington lobbyists and some Congressmen in powerful committees, who would lose a lot of influence were it to pass. Perhaps this is the best reason of all for supporting it.
The FairTax would basically be a 23% federal sales tax on everything, that would be balanced by a “prebate” that would rebate the tax burden that would be paid by a family living at the poverty level. So as I understand it, you’d only be paying this consumption tax on purchases above the poverty level.
Moving to a consumption tax is key, because this would put our industries on a much more competitive basis with those of other countries. Right now, in Texas at least (I know some states are different), if you buy a $100,000 home, you have to pay property tax, on the order of 2.5%, every year on that home, which is made in America, of course. On the other hand, if you buy a $100,000 car imported from Germany, England, or wherever, you generally don’t have to pay this tax every year. But if you you buy a $100,000 aircraft made in Wichita, Kansas, you do!
Of course, this is property, not income tax, but it’s just one glaring example of how our system in some many subtle ways (double taxation of overseas earnings is another) rewards importers over domestic industries. A consumption tax would lower the effective cost of our goods overseas and make our manufacturing, agricultural, and other industries more competitive, while at the same time likely doing more to improve conservation of resources and protection of the environment than a lot of other measures would.
I have long thought the media ought to do a far better job of reporting on stuff that would actually have practical value. I think it was U.S. News & World Report that used to have a column, “News You Can Use”. Journalists miss an awful lot of opportuntities to provide information that could actually be helpful. Nowadays, for example, you still sometimes see references to internet sites in articles which fail to include the URL address.
Well, at least someone was thinking at the Houston Chronicle the other day. Their April 17th business section included an article (p. D2) on post offices that would take tax returns past the normal 5:30 cutoff, and how late they would be open.
To top it off, the Chronicle even printed a full-size form 4868 so readers could file for an extension (the form’s only about a quarter page). Now that was being helpful!
Comment by Gordon R. Vaughan — April 18, 2007 @ 5:19 pm
American Heritage, which has reportedly been sold and is in the process of resuming publication, now has an interesting blog on its website.
John Steele Gordon posted a good overview of the Fair Tax, noting, interestingly, that support for it seems to be helping presidential candidate Mike Huckabee.
Gordon points out that “the so-called progressivity of the tax code is an utter sham … It is the middle class, those dependent on a regular salary, that get socked. Warren Buffett has said he pays a lower tax rate than most people who work in his office.”
He goes on to mention some of the key advantages of the Fair Tax plan: “… The vast underground economy would no longer escape taxation, because the earners of that unreported and sometimes illegal income would get taxed when they spend it instead of when they earn it. The huge compliance costs of the current system, for both corporations and individuals, would disappear”
“… It would, to be sure, not be nearly as apparently progressive as the current income tax. But it would be even more progressive in fact”
Moreover, it would no longer penalize folks for saving, and the whole capital gains debate would go away, as would the horrible estate tax mess.
I suppose charitable contributions would be automatically “deductible”, since you wouldn’t pay tax on those expenditures, and I guess non-profits would be exempt from the consumption tax just as they are now for sales tax.
All in all, the Fair Tax plan really does seem like a FAIR tax, and a reasonable, simple, understandable PLAN. As Gordon suggests in his post, I hope it gets to be a major issue in the upcoming election.
Comment by Gordon R. Vaughan — November 22, 2007 @ 7:03 am