How to Fix the Economy
Kathy just pointed me to the web site for Americans for Fair Taxation. Their plan sounds compelling:
Thumbnail Sketch of the FairTax
The FairTax is a consumption tax designed to replace the entire federal income tax system, including personal, payroll, corporate, self-employment, capital gains, gift, and inheritance taxes. The FairTax will allow Americans to keep 100% of their paychecks, it will dramatically reduce pre-tax prices, and it will fully fund the Federal government, including Social Security and Medicare.
With the FairTax, you will get to take home 100% of your paycheck. No income taxes or payroll taxes will be withheld from your paycheck, pension, or Social Security check.
Did you know that hidden income taxes currently make up 20% to 30% of all retail prices? It’s true. According to Dr. Dale Jorgenson of Harvard, hidden income taxes are passed on to the consumer in the form of higher prices, from 20% to 30% higher than they would otherwise be for everything you buy.
Therefore, when the FairTax Act of 2001 abolishes the federal income tax system, prices will drop 20% to 30%. The proposed FairTax rate is 23%. So, instead of paying 15.3% of your paycheck in payroll taxes, plus an average of 28% of your paycheck in federal income tax, for a total of about 43% of your paycheck going to the federal government in Washington, you pay only a 23% consumption tax each time you purchase a new good or service for your own personal consumption above the federal poverty level.
At this 23% rate, the FairTax will pay for all current government operations, including Social Security and Medicare. With a consumption tax like the FairTax, government revenues will be even more stable than they are now because consumption tends to be more constant than income.
With the FairTax, if you choose to buy any new good or service for yourself, a consumption tax of 23%, will be added into the price. If you choose to buy used goods—used car, used home, used clothing—you do not pay the FairTax. If, as a business owner, you buy something for strictly business purposes (not for personal consumption), you pay no consumption tax. So, in deciding what to buy, you get to choose whether or not you will pay the federal consumption tax.
Perhaps most importantly, to ensure that no American will pay tax on necessities, the FairTax plan provides a prepaid, monthly rebate for every registered household to cover the 23% consumption tax spent on necessities up to the federal poverty level. This is how the FairTax completely untaxes the poor, and lowers the tax burden on everyone else. Can you see how much freer life will be with the FairTax instead of the income tax?
This seems like something that deserves serious attention from the blogosphere. I’ll be doing more research. In the interim, I look forward to your comments.
Joshua,
I’m all for it. It would a huge positive step toward establishing a free society - a society with no compulsory taxation at all.
A consumption tax encourages people to invest and discourages them from consuming, so it’s not economically neutral. However, it is far better and cleaner than the mangled mess we have now.
The problems we’ll have to grapple with: people will try to cheat it by buying goods and services through their business which are really for their own personal use; if you tax new homes at 23%, but not “used” ones, this would probably devastate the home construction industry; the same could apply to autos and other big ticket items. I’m also skeptical that we would see immediate 20% pre-tax price drops on retail goods by abolishing the federal income and payroll taxes.
A limited government that still had compulsory taxation could probably operate with a 5% sales tax on all goods and services. There would be no other taxes (property, income, excise, etc.). The rate would have to be higher if serious national defense (an Israel or Taiwan context) were needed. If we had such a government, we would probably be very isolationist since there would be no money for a huge military.
Joe
Joshua:
I think there are a lot of problems with this proposal, first and foremost will be the issue of foreign spending. There will be a powerful incentive for US citizens to consume overseas where they don’t have a huge consumption tax of 23%. Tourists and retirees will extract capital from the US system and spend their money abroad. If they bring their purchases home then you’re into a huge lot of smuggling of jewelry and so on, making criminals out of people who would normally obey the law. You also have the problem of foreign tourists to the USA. If the taxation system would be similar to that of foreign countries now with their VAT (Value Added Tax) those tourists would be taxed the 23% for everything they consumed in the US but would get a rebate for goods they took home. This is another accounting nightmare for the government and expansion thereof. Tourism would dry up.
I would oppose this proposal and suggest that tax reform be concentrated on reducing government spending and eliminating the words, “subsidy”, “grant”, “tax deferment”, “incentive” and anything resembling those words from the government mentality. Eliminate IRAs, ROTHs and any other vehicles for individuals to defer taxes. These are there to “encourage” individuals to provide for their retirement, as if people have to be protected from themselves and that they have no capability of making rational decisions for themselves. Allowing deferment of taxes requires that taxes be raised if the government is to maintain its revenue. At the same time, investors are locked into their investments (at least psychologically) and are prevented from making certain defensive decisions, such as selling short or investing in gold. Unfortunately, Americans have been seduced and they love their social schemes that allow governments to make decisions for them rather than taking responsibility for themselves.
Paul
paul paul the price of the items would come down so much people would be happy
to pay before you say anything else go to fairtax.org call the toll free check
it out. also the tax is only on new items so you only get taxed one time
love ya
notaxbill