Fair Tax

Is the Fair Tax Fair ? Heck, what is the Fair Tax? In short it is a plan to dismantle the current tax system. No more yearly individual tax returns. The current tax code would be wiped. Blank slate. In its place a simple system (to listen to its proponents) with only a national sales tax and a universal stipend system to deal with the issues of survival costs (which most agree we shouldn't tax).

In its place we would get A 30% sales tax. Before the Fair tax advocates scream and shout at me that it is 23% let me finish. The sales tax under the fair tax would be 30%. But it would be equivalent to a 23% income tax. IE a 30% income tax and a 30% sales tax are not equal values. Here is why.

Income Tax:
You make 100 dollars. The income tax rate is 30%. You receive $70 to spend.

Fair Tax:
You make 100 dollars you receive $100 to spend but whatever you purchase has a %30 sales tax added to it. So If I buy something that costs 100 dollars it will cost $130 with tax. But what can I buy for $100 with tax included? Well If a 30% income tax and a 30% sales tax are equal then if I buy something that costs $70 it should cost $100 with tax. Well $70 * .3 taxrate = $21 in tax. $70 + $21 = $91. So as you can see a 30% sales tax and a 30% income tax are not equal.

Essentially a 30% sales tax is equal to a 23% income tax. A 30% income tax is equivalent to about a 43% sales tax.

So what's the Catch? Quite simple and quite appropriate considering this sites title. TANSTAAFL. The pundits and proponents and detractors can yak all they like but in the end this plan is pitched as revenue nuetral. That means that in the end the difference is nil for the average Joe. So don't think for a second that Fair Tax will reduce how much you pay in taxes. However if implemented as presented currently it will change how much the average joe HAS to spend in Taxes. If you spend nothing you pay no taxes. Spend it all you will fork out just as much in taxes as you did before. That is nice in the short run but in the long run you still pay just as much taxes. The only way you don't is if you don't EVER spend it. However this still favors saving which is nice. By saving I reduce my tax burden which in turn increases how much I can save. But its just a bigger number because the money wasn't already taxed. Not because it will buy more. Remember, just because the amount of money you receive might be higher dosn't mean you can actually buy more stuff with it. But the freedom to delay when that burden lands on you is nice make no mistake. IF the system is revenue neutral or resulting in a lighter burden for you.

We are long overdue for some serious Tax reform. The current code has become ludicrously convaluted. It is the moral equivalent of 50 years of rube Goldberg contraptions all combined to make one useless edifice which no one can understand. Whole livelihoods are made out of understanding small sections of the code well enough to teach people how to pay less in taxes. This system seems like a good candidate to at least get us back to a simple system that anyone can understand.

What are the catches ? Well numero uno is that revenue neutral or not this system does not account immediately for savings. So its revenue neutral IF and only IF you spend every dime you make (from the perspective of Uncle Sam)... or if the rate is effectively higher to account for the fact that you do not spend everything. So if you save alot then a move to this system will effectively lower your tax burden. But for people that have to spend essentially everything.. Say a family of 5 with a marginal income, it is going to make no difference at best and potentially hurt more at worst. In any event those that have to spend all that they make will have the highest percentages of their income go to taxes.

Numero 2 is the issue of necessities. The Fair Tax plan currently calls for a stipend based on poverty rate to be issued monthly to account for poverty spending. For example If the poverty rate is 12,000 a year you would get a check from the government each month for 300 dollars to offset any taxes paid on necessity level spendind, or in other words 3600 a year to account for taxes paid for the first $12,000 of income spent. The assumption of poverty level is that you would have to spend that much just to survive at the poverty level and that no one given the option would spend less.

The other option is to pick and choose what sale items are taxed. This is a very difficult thing to do as who gets to decide what is a necessity product, or necessity level of product (Ford vrs a Rolls Royce etc...) and what isn't? The idea of the stipend is to just give a blanket pass on the poverty income amount and let the individual decide what is a necessity and what isn't.

The idea of the stipend is similar to the idea of the graduated tax bracket in the current income tax system. IE your first X amount of income is not taxed, from X - Y is taxed at such and such rate, y - z at such and such rate etc etc... This way they just do it monthly up front rather than doing it at the end of the year. Its really just a question of where you account for it. Not anything new. Big difference of course being you don't get a big bite taken out of your check each week/month and then a tax refund at the end of the year to settle the score. Which is... dare I say it? Much more Fair. However I do think it is a bit of a red herring. Sounds cool to get money each month. But in the end you really are not getting any more buying power. The only reason to do it that way is to allow individuals to make their own decisions about what constitutes necessity purchases. I like that. So long as moral pundits don't start trying to dictate what are and are not viable spending habits for poverty level folks it might even work. The second that stipend starts smelling like food stamps is the second I say it is a stupid idea.

There is one major bonus here. One which is rightfully trumpeted by the proponents of this system. This should effectively tax the consumption of rich people. Corporate expense shennanigens will be at an end. However, I don't think it is quite the cure all to Tax evasion by the wealthy that some would have you believe. For one, Rich people do spend more than the average Joe. But they also Save more. The Percentage of someone's income that ultimately goes to taxes is going to be determined by how much of that income is spent. So someone that makes 2 million and spends 1 million will essentially have a tax rate half that of the fair tax rate. But that afore mentioned family of 5 with a marginal income will have a a tax rate roughly equal to the fair tax rate (23% or 30% however you care to look at it) because they have to spend all of their money to get buy... Stipend or no stipend.

Overall I like the concept but I do worry about the potential pitfalls of implementation. Politics is the art of compromise. Implementing this system has very very little room for compromise. You can't ease it in else you risk keeping to much of the old combined with the new which just makes it worse and not better. Sweeping change like this can happen. But such a fundamental change to our nations tax income is not going to happen without some problems in terms of program funding. That danger is highest with a complete swap which is why I suspect if it ever makes it out of committee and passes into law their will be some kind of phase in period during which the risk will be high for the system turning from a revenue neutral move to a European style VAT system where effective tax burdens skyrocket in a very short period of time. On the other hand I could cross my fingers and hope for a move the other direction... One which strangles absurd government programs in their sleep and we come out on the otherside having leaned out or government, with lower taxes and a system that can do more with less. Yeah Yeah... very optimistic.