It’s (Past) Time to Switch to the Fair Tax


It’s tax time again.  Once again people are gathering receipts, getting their 1099’s together, and either spending their weekends with TurboTax or going to an accountant to have their taxes prepared.  It is likely that most people are spending something like $400 on tax prep fees and/or between ten and twenty hours pulling together the paperwork and filling out forms.  Some have payments due and will need to find the money to write a big check.  Others will be getting a refund, which sounds great until you realize that you have made an interest free loan to the government.  Given that refunds are going out later this year due to the uncertainty at the end of the year, that means the government is keeping your money an extra month or two, still interest free.

The saddest thing is that it doesn’t need to be this way.  If the current income tax (and Payroll taxes) were replaced with a national sales tax, all of the hassle surrounding the filing of taxes would be eliminated.  April 15th would just be another day in the Spring.  You wouldn’t need to set up special tax-deferred retirement accounts and worry if you’d made your yearly contribution.  You wouldn’t need to launder your prescription money through Health Flexible spending accounts and be accused of being a meth maker because you were buying a bunch of cold medicine to avoid losing your remaining balance.  You wouldn’t need to worry if selling a stock would trigger taxes, or buy special windows or appliances to save on taxes.  And finally, you would never need to worry about the IRS or need to keep seven years of receipts handy just in case they call you in for an audit.

The answer is the Fair Tax.  Here’s how it works:

1.  The income and the payroll taxes would be eliminated, meaning that you would receive your entire paycheck.  There would be no need to worry about taxes, fill out W2’s, or track anything for tax purposes.  Without all of these taxes, your paycheck would be at least 25% bigger.

2.  Anytime you buy any new goods or services, a sales tax would be charged.  In order to keep collecting the same revenue as the government currently does, this sales tax would be about 23%.  This sounds hefty, but again your paycheck would be 25% bigger, so you should be saving at least $1000 per year on a $50,000 salary.  If you didn’t spend your entire paycheck, you would save even more.

3.  Unlike the VAT which is being pushed by some to use in addition to the income tax to generate more revenue, goods would only be charged when sold retail to the consumer.  This means that companies could lower the amount they charge since they would not be paying corporate taxes on their income and they would also not need to pay for all of the tax planning they do.  They wouldn’t need to pay for the big HR department to handle tax collections from their workers, meanig they could hire more people to actually make things!  This savings would be passed along to the consumer, in part, meaning that the price of goods would fall.  It is speculated that much of the 23% tax would be offset by the reduction in the cost of goods due to the savings created.

4.  To prevent a regressive tax system, a “prefund” would be sent out at the start of the year.  This would reduce or eliminate the taxes paid on the first dollars of each person’s spending.  For example, if each individual received a $5,000 prefund and the Fair Tax were 20%, no one would be paying taxes on the first $25,000 of their income (because any sales taxes collected would be offset by the $5000 prefund they received).  By setting the prefund appropriately, no one would be paying taxes at all on necessities – it would just be the spending beyond that.  The poor would not pay taxes, nor would people who live modestly and invest for their future while they were building up wealth.

There are a lot of advantages to this system besides not needing to fill out paperwork.  Because it is a sales tax and would be harder to dodge than an income tax, there would be less cheating which means lower taxes for everyone.  Even drug dealers and prostitutes would be paying taxes when they spent their money.  So  would people being paid under-the-table.

Also, it rewards saving and penalizes spending.  Because a society of savers is able to take care of themselves better than a society of spenders, this would make the nation better able to weather downturns in the economy.  It would also mean a lot more investment since investment returns would not be taxed until they were spent, so there would be a lot more innovation and jobs.

If you would like to never worry about keeping track of your income and no longer be in fear that the IRS will come knocking, support the Fair Tax today.  Like this post and share it with as many people as you can.  Tweet about it (#FairTaxNow), put it on your FaceBook wall and talk to all of your friends about it.  Go to the Fair Tax website and learn more.  If you are a blogger, please copy and reblog this post on your site or write your own post about it.  Finally, call, write, and email your representatives and let them know that you want the Fair Tax.  This will be a difficult change to make because people in general are fearful of change and politicians like the current tax system since it lets them reward their special interest groups.  Once people learn the facts, however, they’ll see that it would be a much better system.  Let’s change things this year and let 2012 be the last year you need to file income taxes!

Any concerns about the Fair Tax?  Any ideas on how we could get it enacted?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

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.

2 thoughts on “It’s (Past) Time to Switch to the Fair Tax

  1. FairTax makes too much sense to ever be passed. I know the basics, but how would it work for businesses. I know businesses have complex tax systems and hire CPAs and tax lawyers to sort through it all. Would all these jobs (CPA/tax attorney) be useless and out on the streets if the FairTax passed as well as HR Block filing for bankruptcy?

    No one will ever pass the fair tax, because no one knows how it will affect them. So whats the solution? Meet in the middle. Add on a 12.5% federal sales tax and cut everyone’s tax brackets in half, just for one year, after which is will go back to the old system, unless voted on again. This also preserves CPAs and tax attorneys’ jobs for the most part.

    If at the end of the year the government is raking in revenue from it and citizens are happy with their lower taxes, then maybe take it a step farther.

    • If you talk to most CPAs, they’ll tell you they would much rather be looking at the finances of a business and planning spending and investing than filling out tax paperwork. That said, obviously there would be a lot less tax prep work needed, and there would be less of a need for accountants and especially the poorly trained, non-CPA tax preparers who staff the tax help offices this time of year. That doesn’t mean, however, that a group of smart, diligent people won’t be able to find something to do, and something that is more rewarding than filling out paperwork, particularly when the economy starts booming because the heavy anchor of tax planning and reporting is lifted from businesses.

      The best argument against the Fair Tax is that you’ll end up with both an income tax and a sales tax. Reducing the brackets rather than replacing the income tax entirely would be the surest way to cause that to happen. Plus, you wouldn’t have the advantages since you’d still have all the paperwork. It would take some adjustments, but pulling off the bandage quick and letting things adjust is the way to go. I expect we’ll both be amazed by how people adjust.

      As far as it never passing, it never will unless elected leaders hear calls for it repeatedly and from everywhere. We can do this, particularly now with telling people about it being just a Like or a Tweet away. Spread the word and let’s get this done!

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