Why Don’t People Want the Fair Tax?


Since posting this entry, I’ve had a couple of people rate the entry as “poor” instead of leaving a comment.  I’m thinking they’re actually rating the Fair Tax as poor rather than the post and I’d love to know why.  Please leave a comment and let me know why you don’t like the Fair Tax if this is the case.  If you can’t express a reason, maybe you need to rethink your stance.

I’ve made a few posts in the past about the Fair Tax.  In a nutshell, the Fair Tax would replace all of the existing Federal income taxes, including the Federal Income Tax itself, Social Security Taxes, and Medicare Taxes.  It would be a consumption tax on new goods and services (meaning your yard sale items wouldn’t be taxed, nor would your used car).  It is estimated that the tax rate would be about 20% if tax revenue levels were left the same.  Compare this with income taxes, which are around 10% for those in the middle class, Social Security taxes, which are 6.5% for the employee and the employer, meaning about 13% total, and Medicare taxes, which are about 4% between the employee and employer.  This means your paycheck would increase by about 27% in exchange for paying a 20% sales tax.  Sounds good to me.

But wait, there’s more.  Because businesses would no longer be paying corporate income taxes, and because they would no longer need to maintain a huge staff to handle payroll deductions, tax deferred accounts like 401k accounts, and planning to avoid corporate income taxes, their costs would go down.  This might increase profits a little for the shareholders if the company retains some of this savings, but most of that savings in the cost of providing goods and services would go to lowering their prices and raising salaries.  It is estimated that most of the 20% sales tax would be offset by the reduction in the prices of goods, meaning that the actual price you pay may be about the same, even including the sales tax.

Having less of a paperwork burden would also make it easier for people to open businesses.  If all you had to do was hire people and hand them a paycheck, rather than needing to have an elaborate accounting system to figure out tax withholding and all of the other corporate taxes, more people would be willing to start a business.  This would mean more competition for both customers and workers, meaning more selection, lower prices, and higher wages.

The tax is also not regressive because there is a prefund.  With the prefund every American would receive an electronic deposit from the government at the start of the year or the start of each month to cover part of the sales taxes.  For example, if you wanted the first $20,000 of spending to be tax-free to help low-income earners and the Fair Tax was 20%, you would send a prefund of $4,000 per year to each citizen.  This means that even if a person at the low end of the income spectrum spent their whole paycheck, they would not be paying any taxes.  If they saved a bit they would be getting a supplement to their income.

I’ve created posts on the Fair Tax before, but have gotten few responses.  I also am not seeing the activity needed to get one enacted.  Understand that politicians like the current income tax because it both gives them some control over their constituents and allows them to give special favors to big donors, which in turn helps get them re-elected.  If they want you to buy special windows or certain cars, they can create a tax deduction for those items.  Likewise, they can create special exemptions for coal companies, farmers, or sugar importers and in exchange get donations from those groups who want to keep the special tax break in place.  They even use Social Security to control seniors since all incumbents need to do to defeat a challenger that might restore some fiscal sanity to federal budgets is say she will cut Social Security or Medicare and get the seniors out in mass against her.  To replace the income tax with the Fair Tax, which would take all of the power away from the politicians and take away all of the ability of the IRS to stoke fear in the hearts of taxpayers, would take an enormous ground-swell of people demanding it be enacted.  It might also require some incumbents who enjoy the power they weild and wealth they gain with the existing tax system be replaced.

So my question is, why so little interest?  Do you like paying $100 to buy TurboTax each year or $300 to hire an accountant to help with your taxes?  Do you like to live in fear of an audit?  Do you like to save all of your receipts for business expenses, medical expenses, and write down the mileage from your car odometer after each business trip?  Do you like to keep seven years’ worth of tax returns just in case you get a call wanting you to prove your home office expenses from 2008?

I think it would be wonderful to get my whole paycheck rather than what is left after all of the taxes are removed.  I think it would be great to just throw out those receipts and not worry about what price I paid for a stock back in 1982.  I would love to not need to worry about making deposits to an IRA account before a certain date or worry about the limits for deposits to an HSA.  So what am I missing?

Please leave a comment with your reasons for not wanting the Fair Tax if there is something I’m missing.  If you support a Fair Tax, how about leaving a comment saying that so others could see this is not some crazy idea.  And if you do want the Fair Tax, how about writing a quick email to your Representative and Senators (just search for the US House of Representatives and the US Senate in Google and you’ll get the contact information in a few seconds).  And when politicians come calling or the political parties come asking for a donation, how about expressing your desire for a Fair Tax to them.  Maybe 2014 could be the last year where you’ll need to file income taxes.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

14 comments

  1. My husband owns a small business with is family, so anything that reduces paperwork, eases regulations and leaves more money to invest back into the business and salaries is a good thing. Small businesses are the job creators in this country, and something needs to be done to let these businesses flourish and create those sorely needed jobs.

  2. HR:25 is the way out of the nightmare that is our current Federal Income Tax. History shows the Citizens of the United States have made mistakes from which We have repented.
    Example: Amendment 13, 15 & 21; abolished slavery racial discrimination in voting and repealed prohibition.
    When “We the People” have discovered mistakes in the Constitution We have worked to repeal those mistakes. HR:25 is such a Bill. Titled the Fair Tax Bill it allows for a orderly progression from the current failed Federal Income Tax (mistake). Passage of the 16th Amendment allowed the first Federal Income Tax! Before this Amendment only “uniform” Taxation was allowed by Article 1, Section 8.
    Below is an examination of the history of our current failed Federal Income Tax and how it was first structured. These are 1913 Rates after the 16th Amendment passed allowing the first Federal Income Tax. There were no deductions the tax was flat but graduated for income. This was because the Federal Income Tax was sold as a tax on the wealthy that would not apply too poor or middle class Citizens.
    Note: $20,000.00 in 1913 would be ~$476,000.00 in 2013 Dollars!
    Nominal Married Filing Jointly
    Marginal Tax Brackets
    Tax Rate Over But Not Over
    1.0% $0 $20,000
    2.0% $20,000 $50,000
    3.0% $50,000 $75,000
    4.0% $75,000 $100,000
    5.0% $100,000 $250,000
    6.0% $250,000 $500,000
    7.0% $500,000 –
    These rates are well below the 10% rates proposed by some who oppose HR:25 and support a flat 10% Federal Income Tax. What are you paying today, 30, 35, 40 + percent?
    Once the 16th Amendment passed, the unscrupulous Representatives and Senators behind the Income Tax push knew they could increase the Tax rate or change the Wage & Income range. They would no longer be bound by the restrictions of the Constitution. The Citizens would be at the mercy of the Federal Government. In less than 5 years the rate more than doubled along with an expansion in the Income base! Note they have done this with impunity since 1913! These unscrupulous Representatives and Senators behind the Income Tax as well as many in Congress today knew manipulation of the the Income Tax Code would give them great power.
    Since 1913 this change in taxation powers has allowed the Federal Governments, IRS to punish the Citizens of the United States with little or no restraint. The Income Tax has allowed Senators, Representatives & Presidents to pay off contributors and lobbyist using loop holes and special tax rates while striking fear in the harts of Citizens speaking out against these abuses. And now the Federal Government can use not only the IRS but Health Care as a weapon of control.
    The 16th Amendment has allowed the Federal Government to become the uncontrollable parasite it is today. There can be no Federal Tax Reform without the repeal of the 16th Amendment to the U.S. Constitution! When someone promotes reform of the Federal Tax Code without the provision to repeal the 16th Amendment they are working to keep control in the hands of Government not the Citizens!
    We will be part of the greatest peace time political struggles ever witnessed by the Citizens of the United States when HR:25 is put before the full House. There are Trillions of dollars in favors and paybacks at stake. Don’t be fooled, study the history of the United States before 1913 and after. The greatest growth and prosperity for the Citizens of the United States occurred from 1776 too 1913. In contrast the Federal Government its Debt, Tax burdens and abuses grew exponentially after passage of the 16th Amendment which allowed the first Income Tax!
    Please, don’t take my word for this, go to http://www.fairtax.org or http://thomas.loc.gov/cgi-bin/query/z?c113:H.R.25: House Bill site. Down load a copy of HR:25 it is only 131 double spaced typed pages long, yet replaces thousands of pages of current Federal Tax Code.

    • Thanks for the great info. I’m guessing that the only way to change things will be if there is a deafening call from ordinary citizens and several incumbents tossed out of office. The special interests are too powerful for the law to be changed by just a few interested constituents.

  3. I love the prospect of a Fair Tax being enacted. I’ve been an ardent supporter for the last ten years. I’ve even gone as far as donate my hard earned, non-tax deductible, income to the cause.

    I think a lot of Republicans and some middle of the road Democrats like the bill (HR25). What they’re afraid of, is the lost power they hold in their grubby little hands, that they get from the current system. Without the income tax, IRS, and the tax returns, they have nothing to throw out to prospective political appointees, to catch them off guard. They also lose an agency that, for all other practical purposes, keeps a watchful eye on the populace through their banking and other monetary issues. Even the tax cutting right doesn’t want to lose that power.

    A lot of fellow tax payers I talk to go as far as saying the Fair Tax is nothing more than “corporate” welfare. Letting them off the tax hook. Not knowing that they still have to pay the Fair Tax on all their supplies and new product purchases. They also don’t like the prospect of having to continue supporting Social Security and Medicare, after they retire. The current system doesn’t make them pay as it is now. They also think the pre-bate idea is a scam, and that the poor, and retired citizens will not make out a good as they do now.

    I’m a realist. The current system can’t go on in its current form, because eventually the tax rate will have to rise and rise to make up for ongoing cost of living rises in prices, until eventually we’ll all be paying in excess of 50% out of our paychecks.

    The Fair Tax puts the burden of cost spending on the government squarely. If citizens don’t like where their money is being spend, we simply stop buying new goods, and curb what we spend in services. Then again, what’s to stop our greedy little government from raising the Fair Tax rate percentage, or abolishing it all together. With today’s technology advances, do we really need a central representative style government to begin with. Why not let us vote up or down on government spending. Now there’s a novel idea, I’d like to see happen.

  4. One thing you got wrong is the fact that corporations don’t pay income taxes. They simply collect them and pass them along. It is a line item on their cost sheets. Other than that you are correct on most items. People loosing their jobs or companies paying people to comply with tax laws would be off set by the new jobs created. Imagine no corporate “tax” which is passed along to consumers and dollars being held overseas to avoid double taxation would come flying back to this country. Jobs would be plentiful and unemployment would decrease. Businesses could then concentrate on business instead of taxes. There are so many advantages to the Fair Tax that they are too many to mention here.

    ENACT THE FAIR TAX NOW!

  5. I don’t think the FairTax is “perfect” but its the best thing I’ve seen in a while. The only way to overcome “income inequality” is to give people an incentive to work. As it is now, a criminal selling marijuana (an easy drug trade to get into) is able to make tax free profits, while someone working a full-time job has to pay 25-45% tax after all is said and done, while a trust-funder is able to get away with extremely low taxes on their investments.

    You look at that and you see, well working a fulltime job is clearly the worst way to get money in your pocket and if you’re not a trust-funder, then you turn to under-the-table deals.

    I would be ok if they changed the Fair Tax to keep capital gains taxes the way they are now (free if you earn less than $75k taxable) and just cut out the income taxes so that working a fulltime job is completely tax free. That might give the Democrats what they want since the unearned investment income would be taxed, but people would have more money to invest with, and it wouldn’t tax anyone more who relied on investments (ie retirees).

    Less people would be risking their lives selling drugs when they could make 30% more at a job than they used to. That’s the most important part as I see it.

  6. Its the only thing that makes any sense. Irs gestapo shut down, illegal aliens would at least pay something as well as currently under the table wage earners! I run a very small business and doing away with receipts and paperwork piling up would give me a new lease on life lol. If I had to pay a bit more for items oh well I can budget for the known costs easier than tracking everything. Whats more its a green idea less paperwork is less trees being slaughtered for un-needed record keeping imo.

    • Thanks for reading and thanks for the comment. The only reason I could see to be against it is to keep IRS employees in jobs and because people want to keep their favorite tax breaks, even though they would end up paying less under the Fair Tax.

      There will certainly be resistance from Congress because it would take a lot of their power to drive behaviors through tax breaks away. Getting the idea passed will take thousands of people writing their Representatives asking for it and telling their friends to do the same. Please help with your part.

      • There would still be an IRS. It would just be smaller because there’d be fewer taxpayers.

        In order to keep us (I’m an IRS auditor) from being destitute, the gov’t could offer buyouts initially to those with enough service time to retire. This could take care of 1% of the employees. Buyout money could come from the sale of a large campus property or two. Following this, furloughs could be enacted, encouraging some to retire and/or get new jobs while on unemployment.

        If the new IRS is going to be 1/3 the size of the one we have now, then hiring could be restricted to 1 new hire for every 3 vacancies for the proceeding 10 years.

        It would be counter-intuitive to throw out good people who have managed the current system, and this approach is fairly fast in terms of progress being made. Overall, the IRS would be bloated for maybe 2-3 years, then a plump, then just right, IMO.

      • I could see a lot of things former IRS employees could be doing. For one thing, I would love to see more auditors in the welfare programs to reduce corruption and mismanagement. I’ve also thought that it is a bad idea to hand people many people a check when as a group they’ve shown that they make bad financial decisions. Perhaps if we had more control over the use of the money, which requires personnel, we wouldn’t need to send both food welfare to feed a family of four and then provide free breakfasts and lunches at school for the same kids. Finally, if you shift more people from being a necessary drain on the country’s production to being producers, you’d end up with a wealthier society. Don’t take that last point wrong – obviously security and defense, along with reasonable regulation are needed to enable producers to do their part. It is just that you can expand the economy more if you eliminate the need for some of the overhead costs.

  7. What’s interesting is that we can see how this program would or wouldn’t work.

    Example – Tennessee has a high sales tax and no income tax. It also has free community college!
    Example – Texas has high sales tax, particularly on travelers (rental cars, hotels, etc.). It also has gorgeous roads and a balanced budget.

    Just go to a place where something is enacted and see how it works. We see how the USSR failed in Communism, and how Seattle is thriving with a $15 minimum wage, as well as the state of Washington with higher-than-avg min wage.

    • A lot of the “free” community college in Tennessee is funded by a tax on people who are poor at math – a lottery that was enacted a few years ago – and I’m not sure if it will be financially viable long-term. They’re also seeing a lot of people in the community colleges who are not serious enough to even do their homework. You’re right, though, that states without income taxes do seem to fund things without an issue.

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