cleared that misunderstanding right up and gave me quite an economics lesson. I understand "embedded" taxes much better now.
My gut feeling is that there are quite a few other people who may be under the same misconception that I held - 23% sales tax at the register. So let's start with just the basics - here is a thumbnail sketch (from www.fairtax.org):
Thumbnail Sketch of the FairTax
(PDF VERSION)The FairTax proposal is a comprehensive plan to replace federal income and payroll taxes, including personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes. The FairTax proposal integrates such features as a progressive national retail sales tax, dollar-for-dollar revenue replacement, and a rebate to ensure that no American pays such federal taxes up to the poverty level. Included in the FairTax Plan is the repeal of the 16th Amendment to the Constitution. The FairTax allows Americans to keep 100 percent of their paychecks (minus any state income taxes), ends corporate taxes and compliance costs hidden in the retail cost of goods and services, and fully funds the federal government while fulfilling the promise of Social Security and Medicare.
Americans take home their whole paychecks.
Not only do more Americans have jobs, but they also take home 100 percent of their paychecks (except where state income taxes apply). No federal income taxes or payroll taxes are withheld from paychecks, pensions, or Social Security checks.
The prebate makes the FairTax progressive.
To ensure no American pays tax on necessities, the FairTax Plan provides a prepaid, monthly rebate (prebate) for every registered household to cover the consumption tax spent on necessities up to the federal poverty level. This, along with several other features, is how the FairTax completely untaxes the poor, lowers the tax burden on most, while making the overall rate progressive. However, the FairTax is progressive based on lifestyle/spending choices, rather than simply punishing those taxpayers who are successful. Do you see how much freer life is with the FairTax instead of the income tax?
No tax on used goods. The amount you pay to fund the government is totally visible.
With the FairTax you are only taxed once on any good or service. If you choose to buy used goods − used car, used home, used appliances − you do not pay the FairTax. If, as a business owner or farmer, you buy something for strictly business purposes (not for personal consumption), you pay no consumption tax. The FairTax is charged just as state sales taxes are today. When you decide what to buy and how much to spend, you see exactly how much you are contributing to the government with each purchase.
Retail prices no longer hide corporate taxes or their compliance costs, which drive up costs for those who can least afford to pay.
Did you know that income taxes and the cost of complying with them currently make up 20 percent or more of all retail prices? It’s true. According to Dr. Dale Jorgenson of Harvard University, hidden income taxes are passed on to the consumer in the form of higher prices for everything you buy. If competition does not allow prices to rise, corporations lower labor costs, again hurting those who can least afford to lose their jobs. Finally, if prices are as high as competition allows and labor costs are as low as practical, profits/dividends to shareholders are driven down, thereby hurting retirement savings for moms-and-pops and pension funds invested in Corporate America. With the FairTax, the sham of corporate taxation ends, competition drives prices down, more people in America have jobs, and retirement/pension funds see improved performance.
The income tax exports our jobs, rather than our products. The FairTax brings jobs home.
Most importantly, the FairTax does not burden U.S. exports the way the current income tax system does. The FairTax removes the cost of corporate taxes and compliance costs from the cost of U.S. exports, putting U.S. exports on a level playing field with foreign competitors. Lower prices sharply increase demand for U.S. exports, thereby increasing job creation in U.S. manufacturing sectors. At home, imports are subject to the same FairTax rate as domestically produced goods. Not only does the FairTax put U.S. products sold here on the same tax footing as foreign imports, but the dramatic lowering of compliance costs in comparison to other countries’ value-added taxes also gives U.S. products a definitive pricing advantage which foreign tax systems cannot match.
The FairTax strategy is revenue neutrality: Neither raise nor lower taxes so consumer costs remain stable.
The FairTax pays for all current government operations, including Social Security and Medicare. Government revenues are more stable and predictable than with the federal income tax because consumption is a more constant revenue base than is income.
If you were in a 23-percent income tax bracket, the federal government would take $23 out of your paycheck for every $100 you made. With the FairTax, if the federal government gets $23 out of every $100 spent in America, the same total revenue is delivered to the federal government. This is revenue neutrality. So, instead of paycheck-earning Americans paying 7.65 percent of their paychecks in Social Security/Medicare payroll taxes, plus an average of 18 percent of their paychecks in federal income tax, for a total of about 25.65 percent, consumers in America pay only $23 out of every $100. Or about 30 percent at the cash register when they elect to spend on new goods or services for their own personal consumption. And this tax is collected only on spending above the federal poverty level, providing important progressivity.
Tax criminals don’t make criminals out of honest taxpayers.
Today, the IRS will admit to 25 percent noncompliance with the code. FairTax.org will be generous and simply take the position that this is likely a conservative estimate of the underground economy. However, this does not take into account the criminal/drug/porn economy, which equally conservative estimates put at one trillion dollars of untaxed activity. The FairTax does tax this criminals love to flash that cash at retail while continuing to provide the federal penalties so effective in bringing such miscreants to justice. The substantial decrease in points of compliance from every wage earner, investor, and retiree, down to only retailers also allows enforcement to concentrate on following the money to criminal activity, rather than making potential criminals out of every taxpayer struggling to decipher the current code.
What is the FairTax Plan?
The FairTax Plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
What is Americans For Fair Taxation (FairTax.org)?
FairTax.org is a nonprofit, nonpartisan, grassroots organization solely dedicated to replacing the current tax system. The organization has hundreds of thousands of members and volunteers nationwide. Its plan supports sound economic research, education of citizens and community leaders, and grassroots mobilization efforts. For more information visit the Web page: www.FairTax.org or call 1-800-FAIRTAX.
2 comments:
Subject: Fair Tax
The Fair Tax proposal is two-fold and based on two premises:
(1) Replace the Federal personal income tax, Federal corporate tax, and they payroll tax (Medicare and Social Security) with a 23% sales tax.
(2) Providers of goods and services will reduce prices up to 30% offsetting the 30% sales tax applied to new purchases and all services.
The problem with item (1) is that the Fair Tax is in effect a 30% tax. The proponents arrive at 23% sales tax rate by saying the $30 tax on a $100 purchase of goods and services is really 30/130, or 23%.
The problem with item (2) is that providers of goods and services will not reduce prices up to 30% to offset the new sales tax of 30%. The vast amount of the tax savings, reduced costs, and increased profits will flow to the bottom line and be passed onto executives and owners, not the employees or customers.
The savings from moving manufacturing to low-cost sweat shops in Asia, China, Mexico, cutting US jobs, and dropping Federal Corporate taxes to 5% to bring back money from overseas entities went directly to the executives and no one else.
When the Medicare Advantage HMOs talked the Government into giving them a $7 – $9 Billion dollars more than Medicare spends on Medicare beneficiaries, most of went to executive perks, bonuses, and retirement for the HMO executives (such as the $400-Million Dollar taken by one HMO executive on his retirement).
The Fair Tax proposal works directly against the needs and contribution of tens of millions of current retirees and increasing numbers of baby boomer retirees approaching retirement.
The Fair Tax proposal will enable retirees, most of whom have a Federal Tax obligation of less than 10% and no payroll tax to pay a tax of 30% on all their purchases with an offset for people below the poverty line. Since most retirees spend most of their annual income, the tax may well approach the 30% rate for the rest of their lives.
Retirees will also pay a 30% tax rate on purchases made with Roth-IRA income which was supposed to be tax free. They will also pay a 30% tax on purchases/services made with Social Security income that is currently tax free for many retired individuals and couples, and partially taxed for others.
The fun will only be starting. If the Fair Tax is enacted, the proponents will then recommend the following:
(1) Eliminate the Social Security Trust Fund (which has loaned Trillions of Dollars to the US Government) and state there is no need to return the Trillions they borrowed and spent. They will propose funding Social Security and Medicare out of the annual Federal budget.
(2) Declare the Social Security and Medicare beneficiaries to be "freeloaders sponging off the largesse and charity of the Government" and guilty of a giant entitlement fraud perpetrated upon the hardworking titans of industry, notwithstanding that tens of millions of Americans have prepaid payroll contributions that will sustain current Social Security benefits for another 30-35 years. This was based on the foolish assumption that the US Government will pay back funds borrowed from the Social Security Trust Fund (the Payroll Taxes paid by working Americans and legal resident aliens).
Note: If we can pay back funds borrowed from China and Saudi Arabia, we ought to be able to pay back the contributions borrowed from the Social Security Trust Fund (that were received as payroll taxes paid by working American citizens and legal resident aliens.
(3) The final step will be to means-test the receipt of Social Security and Medicare to make sure that no one ever receives back benefits they paid for over working careers of 40-50 years or more.
(4) Now that they have decimated retirement and health care for tens of millions of retired Americans, they will now subject them to a 30% sales tax for the rest of their lives to continue the charity program for the friends of the Fair Tax and Global Economy (Note: Middle Class not included).
American Industry, Members of Congress and the current Administration have participated in the decimation of defined benefit pension plans, eliminated millions of US jobs and run the Federal deficit from approximately 5 Trillions Dollars to well over 9 Trillion Dollars in the name of Global Economy (and a welfare program for their friends).
The quote that comes to mind on this giant Ponzi scheme, which I believe was made by Joseph Welch at the Congressional Army hearings in the late 1950's regarding Congressman Miller (R-Buffalo, NY), is “HAVE YOU NO SHAME”?
ConcernedCitizen is closer to being right.
Middle class retirees, like myself, would be devastated. We spend most or all of our income, and we now pay only a few percent in federal taxes. Under the Fair Tax we will lose thousands of dollars a year.
I'd also question "income taxes and the cost of complying with them currently make up 20 percent or more of all retail prices" in the original post. 2007 corporate taxes as a percent of retail sales are estimated to be about 7.6%--not that prices would necessarily fall by even that much.
Things obviously don't add up. Everybody can't be better off, as the Fair Tax supporters imply.
I don't have any problem with the concept of a sales tax, but the current formulation would financially ravage many of our elderly, and that's unconscionable.
The Fair Tax folks just need to be honest about where the burden falls. Their website is very deceptive. Just try out their calculator. If you look closely, you'll see it doesn't handle SS and pension income. Wonder why? If you do enter it as income, you get a completely wrong comparison with the current system.
All in all, it appears the Fair Tax just one more dishonest tax scheme! I could be wrong, but I need to be convinced. An honest and accurate calculator on the Fair Tax website would be a good start.
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