Since we have recently completed another tax filing season, I thought it was a good time to speak again about the Fair Tax. For those who don’t know, the Fair Tax is a national sales tax that replaces all other Federal taxes (income taxes, corporate taxes, Social Security taxes, etc…). The Fair Tax is prevented from being regressive through use of a “prebate,” which is a sum of money paid to each citizen at the beginning of the year to cover a portion of the taxes. For example, if the Fair Tax is set at 20%, and the prebate is $10,000 per person, the first $50,000 of income would be tax free (because one would pay $10,000 in taxes if one spent $50,000 but receive $10,000 from the prebate).
There are several advantages to the Fair Tax over the existing taxes:
1. It is very simple, with no filing requirements. People just pay the tax as they buy things – never fill out a form or pay an accountant again.
2. It rewards savings and earning money and penalizes spending. The current system rewards behavior that gets people in trouble – borrowing and spending – and penalizes saving, investing, and working.
3. It removes the need for all of the tax-advantaged accounts. No more IRAs, Medical Savings Accounts, etc… and all of the book-keeping that goes with it.
4. You receive your whole paycheck – no more having Mr. FICO take out his share before your get your money.
Obviously there are some concerns about a consumption tax. People are always afraid of a new tax since they’re afraid it will be added but the old tax will remain. You also might be wondering about the size of the sales tax. Here are the answers to some common questions:
Q: How high will the sales tax be?
A: If revenues were to remain the same, a tax rate of about 23% would be needed. Remember though that you would get your whole paycheck (including the 15% taken out for income taxes and the 9% or so taken out for Social Security and Medicare. In addition, because there would be no corporate taxes, prices of things would be expected to drop. In fact, if you include a reduction in expenses since companies would no longer need to hire legions of accountants for tax compliance and strategy, things might actually cost a lot less.
Q: Isn’t a sales tax regressive?
A: No, not the Fair Tax. Because of the prefund, you can make it as progressive as you would like.
Q: What would keep us from ending up with both the sales tax and the income tax?
A: Of course this is a possibility, but it is all based on the people you elect. The income tax could also be raised to 90%. If you don’t want higher taxes, vote for people who will cut the size of government. Besides, there is currently talk of enactment of a Value Added Tax to raise more money (since they can’t justify raising income taxes anymore), which would be worse than a sales tax. The Fair Tax would only be paid when new goods are sold. A VAT would be added to each step of the manufacturing process.
Q: How can we get the Fair Tax enacted?
A: It will take time because it is a big change. If you are interested, write to your representatives and let them know you are interested in the Fair Tax. Also, tell your friends and have them write. If enough people talk to their representatives, we can get this done.
WRITE TO YOUR SENATORS AND REPRESENTATIVE ON APRIL 23rd AND ASK THEM TO PASS THE FAIR TAX. If enough people write at once it will make a bigger impact.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.