The income tax has made liars out of more Americans than golf.

--Will Rogers

I’ve written two recent pieces on the income tax. In the first, The Ides of April, I talked about some of the problems and the economic harm caused by the current income tax code. In the second, The Tides of Change, I talked about a few of the benefits of a “flat tax”.

Also in the second piece, I noted that we have already had tax reforms wherein the marginal tax rates were reduced, and the tax code was (at least modestly) simplified. However, satisfied with the results, but seemingly bored by the effort, the electorate failed to keep a close watch over Congress.

(The power to provide tax shelters for supporters and lobbyists and to punish political enemies is, after all, the single most important weapon in Congress’s campaign arsenal. What they’re actually doing is granting tax privileges to some at the expense of the rest – all in an effort to be reelected.)

So, almost immediately, lobbyists resumed their lobbying and politicians resumed their politicking until a new, bloated, confusing, and punitive, free-market busting, economy dragging tax code arose like the Phoenix to take its place.

So the question every freeborn American should be asking is, “If the flat tax won’t stay flat, is there a better way?”

I’m glad you asked! There are a growing number of people actively supporting an interesting alternative called the Fair Tax.

Now, close your eyes and envision a world without the IRS!!!

Unlike the Flat Tax, which can be described as a leaner version of our current income tax, the Fair Tax is completely different. In fact it isn’t an income tax at all – it’s a national sales, or “consumption”, tax. It would replace the personal income tax, the alternative minimum tax, capital gains tax, the corporate income tax, Social Security tax, the self employment tax, estate tax, Medicare tax, gasoline tax, and the gift tax. Under the Fair Tax, you are only taxed once, so used goods would be exempt. Neither would you pay taxes on money you put into savings or investments.

The Fair Tax is eminently fairer because everyone consumes goods and services, but under our current tax system – and even under the Flat Tax – not everyone pays income taxes. The IRS estimates that over $350 Billion dollars in revenues are lost annually due to failure to report income (how much income do you think the criminal, drug, and porno industries report to the IRS for instance?). The Fair Tax would also eliminate the ability to escape taxation through the use of loopholes that most freeborn Americans consider to be unfair.

The Fair Tax is designed to be revenue neutral, meaning the federal government would collect the same amount of money as it does now.

Under the Fair Tax, a 23% sales tax would be collected on all goods and services at the retail level. Before you hyperventilate at the thought of a 23% sales tax, remember that you will take home 100% of your paycheck – no federal income tax, no withholding tax, no Social Security tax.

Sidebar

You’re going to hear opponents say that the rate will actually be 30%, so let’s tackle that one now. The difference arises from the method of calculating – “inclusive” or “exclusive”.

Suppose you purchase pair of boots for $130. The boots themselves cost $100 and the tax is $30… so, the $30 is 23.08% of the $130 purchase price.

However, merchants aren’t going display the boots for $130. They will display them at $100… thus the tax of $30 is 30%. So I think it’s a little misleading to call it a 23% tax. However, on their website, they do refer to both 23% and 30%, and explain the difference.

End Sidebar

Under the current system, the price you pay for goods hides string of corporate taxes – along with their costs of compliance – on every purchase you make. With the Fair Tax, these costs will disappear and the base cost of goods will be correspondingly less. Economists estimate these hidden costs average 20%.

Let’s see how all this would work using our boot example. Under our current tax system, these boots cost $100. Eliminating the hidden taxes embedded in the original price, reduces them to $80. Now adding the 30% sales tax brings the new out-the-door cost up to $104 – only $4 more than the cost under the IRS. (Don’t forget, you get your full paycheck to shop with.)

“Well”, you ask, “what about low income families?”

The Fair Tax includes a monthly “prebate” provision that reimburses every registered household for sales tax on items purchased up to the Federal poverty level. Thus, you essentially pay no taxes on the “necessities of living” – so in effect you choose the taxes you pay by deciding what purchases you make.

Conservatives often say that government doesn’t create wealth, but is instead a drag on the economy. Adopting the Fair Tax would eliminate the IRS with its roughly 100,000 employees, along with the tax preparers, accountants, and bean counters required under our current tax system. After a period of adjustment, rather than a drag they will become a boost to the economy as they find jobs in the marketplace.

I’ve only touched on some of the benefits of the Fair tax. Some of our current problems that the Fair Tax would help are Capital Formation, low (or negative) saving rate, job losses overseas, companies moving off shore, unfavorable trade rules, and more. For additional information, two good web sites to check out are www.fairtaxnow.org and www.fairtax.org.

Are there any disadvantages or problems?

Yes, I see several.

1. The types of goods on which states charge sales tax vary from state to state – e.g. books, food, services are exempted in many states. The potential for confusion is great, unless the states change their laws to confirm with the federal consumption tax rules.

2. Although the Fair Tax would abolish the IRS, there would need to be some new bureaucracy to calculate and administer the prebates.

3. Just as they do now with the tax code, politicians would be tempted to tinker with the new Fair Tax code. Is the devil we know any worse than the devil Fair Tax would create?

4. The 16^th Amendment – authorizing the income tax – would have to be appealed or we would eventually end up with both taxes!

5. An additional $4,000+ on a $100,000 home would discourage many potential buyers. Yes, no income tax would level the cost somewhat, but how many young couples would be scared off anyway? Demand for used homes would go up while that for new homes is bound to drop.

6. Many baby boomers and other retirees have paid income taxes all their working lives. They would not look favorably on now having to pay a new federal sales tax.

7. There’ll always be people looking for ways to cheat the system by smuggling, black markets, and ways I haven’t even thought of.

Bills supporting both the Flat tax and the Fair Tax have been introduced in Congress – HR 1040 and HR 25 respectively. Interestingly, the Fair Tax – which would produce the most dramatic change – has 60 cosponsors, while the Flat Tax has only 5. Does this mean there is 12 times the support for the Fair Tax? Hardly!

The howling of the hundreds of thousands whose jobs would be endangered would certainly be heard in Washington. And, threatened with a loss of power themselves, politicians will be listening. These cosponsors know this, and they know it has virtually no chance of passing. (I hope they’re wrong, but at this point I don’t think it has a snowball’s chance!) So they have no qualms about mollifying the folks back home by signing on as cosponsors to a bill they don’t really support because they know it’s not going anywhere.

I’ve touched on both sides, and thrown a wet blanket on the prospects of the Fair Tax ever passing. How do I personally feel? I think it would be great. Even though I am one of those on the downwind leg of our working careers I would support the Fair Tax over the Flat Tax.

But the political reality is that, of the two, the Flat Tax has a better chance of passing. But even that’s not going to be easy. Either one will take a massive grassroots effort. The Flat Tax is something everyone can understand. The Fair Tax takes too much ‘splaining.

Alright… now that you’ve seen the vision, open your eyes and go to work. Which one can you support? The Flat Tax or the Fair Tax? How do your Congressman and Senators feel? Do they know how you feel? If not, why not? If it’s going to take a grassroots effort – and it is – you are part of the roots. The 2008 election season has started early, and there are a lot of presidential candidates looking for voters. There’ll never be a better time to grab their attention and demand their support!!!