Promoters of the Fair Tax point to things like the ability to collect your entire paycheck instead of having a portion withdrawn for taxes before you see it. They also talk about how under-the-counter businesses would pay their fair share, instead of getting money tax-free as they do now, since they would be buying things too. Even drug dealers and prostitutes would be contributing to the tax base, lowering taxes for everyone. Still interest has been limited, largely I believe because people don’t realize just how much of a timesaver it would be for everyone.
In a nutshell, the Fair Tax is a sales tax on new goods that would replace the income tax, Social Security Taxes, and all other Federal taxes. You would still see state income taxes if you are foolish enough to live in a state that has them (I’m talking about you, California), but there would be no federal taxes. There would also be no corporate income taxes, which means that groups like Burger King would not be fleeing the country for places with lower taxes like Canada. Instead, businesses would be flocking here because they would not need to waste lots of money on tax planning and tax avoidance.
To prevent being regressive, meaning that poor people wouldn’t end up paying a greater percentage of their income than rich people, there would be a prebate where everyone would get a check from the government to cover a portion of the taxes. For example, give a $10,000 per year prebate out to everyone with a 20% Fair Tax and no one who makes less than $50,000 per year would pay any taxes, even if they spent their entire paycheck on stuff that was subject to the Fair Tax.
A lot of the advantages of the Fair Tax go beyond getting your whole paycheck each month. The Fair Tax greatly simplifies accounting and record keeping since you would not need to prove to the IRS what you made and what you spent on deductible items. What would you not need to do if there were a Fair Tax instead of an Income Tax? Let me list them:
1. You would not need to give you Social Security number for a job, a bank account, or any other purpose, because there would be no Social Security numbers. Credit card companies would actually need to do their jobs and verify your identity instead of relying on a number.
2. You would not need to turn in a W-4 listing dependants, because there would be no withholding of taxes from your paycheck.
3. You would not need to keep a receipt from the doctor’s office, because there would be no need to prove medical deductions. You could throw them out.
4. There would be no need to keep charitable donation receipts, because you would not need to claim them on your taxes. Worried about losing the deduction? Don’t be – you’ll be taking home more money, leaving you free to give or keep as you desire. Your “charity” would not even need to be officially recognized by the IRS.
5. Conservative and Liberal groups would not need to submit any paperwork to the IRS for approval, because there would be no taxes on any contributions they received.
6. You would not need to fill out paperwork for home energy improvements to get a tax deduction. Politicians would just make such items exempt from the Fair Tax or reduce the Fair Tax on them if they wanted to keep using the tax system to drive behaviors.
7. Seniors wouldn’t need to worry about paying income taxes on the Social Security benefits if they made too much money before retirement age and were taking benefits early, because there would be no income taxes.
8. You would not need to fill out tax forms in April, because there would be no income tax and the IRS would never bother you unless you ran a business that collected the Fair Tax. The IRS could be cut by 95% or more. There go the Star Trek skits.
9. You would not need to worry about contributing to medical savings accounts, retirement accounts, and college savings accounts before a certain date each year. You could start whatever accounts you wanted and fund them as you wish, because there would be no income taxes on the earnings. You could also withdraw the money as needed because there would be no penalties to pay.
10. You could give as much money as you wanted to your children or whomever else you wanted at any time because you would not need to pay estate or gift taxes.
So, what will you do with all of the time you’ll be saving by not needing to fill out tax forms, not needing to fill out employment forms, and not needing to keep and organize receipts?
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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.