The FairTax

Your first inclination may be to ask how tax and fair can be remotely placed in such close proximity. If you ask any segment of our society, they will all explain how they are taxed inappropriately and other classes of our society are receiving better benefits than they currently are. Of course, every class is probably right in their argument. Our current taxation system is not very fair by most public standards. At this point in time, our government withholds money in the form of taxes from our paychecks. Among these withholdings are specific taxes for Social Security, Medicare, Payroll Taxes, etc. For the most part, Americans can see anywhere from 20%-40% of their paychecks removed before they ever see the money in their hands. Withholding is nice because we have learned to not “miss” this money. We worry about our “take home” pay and the rest was basically never there.

Ok, so that’s all true, but how do we change anything? Can it be changed? There is a book written by Neal Boortz and Congressman John Linder titled “The FairTax Book: Saying Goodbye to the Income Tax and the IRS.” Within the pages of this book, you learn about the creation of our current income tax system and how it has deteriorated into simply a mess of laws and rules which create very unfair treatment of our society’s wage earners. The core principle of the FairTax revolves around completely removing, our current tax system, and replacing it with a tax on consumption. By doing this, your entire paycheck you earn will be given to you and when you decide to purchase something, you will then pay your tax. Well, that sounds great doesn’t it? Or does it?

As with any radical change, there are lots of numbers and adamant supporters and naysayers on the issue. The book does a great job in trying to dispel any lies or misrepresentations aimed at discrediting the FairTax and its probability for success. Linder and Boortz believe we can replace the current withholding tax with a consumption tax that would be revenue neutral. They believe a 23% tax on consumption would give our government the exact same amount of revenue which they currently have. This is where they start receiving the majority of the heat for their idea. They state that it is a 23% tax and that doesn’t sound so bad. Their reasoning is the $100 total cost of an item would be $77 and you would be paying $23 in tax. $23 of $100 is of course 23%. However, that is not how Americans calculate their taxes or think about it for that matter. If the price of the item is $77, to reach $100, you would have to pay a tax of 30%. Break out the calculator and do the math if you don’t believe me.

In reality, it is a 30% tax. Now that doesn’t sound as great as 23% does it? No, but is it different than what is currently in place? No. They cite research showing our current products on average, across the board, includes a 22% inclusive tax in their price. Every product made and distributed reflects the costs of everyone involved and they are all passing costs and thus, taxes along to the consumer. The amount of this cost is 22% on average. So, if you are looking at a $100 item, 22% of it is the result of taxes being passed on to you making the “real” price $78. Turn that around, for a $78 item to reach $100, it’s a little over 28%. Semantics in math is what the authors say. It’s inclusive taxation versus exclusive. What I say is that it’s a moot point. People like hearing the 23% number and it’s correct in a way. But, in reality, the cash register is going to tack on 30% to reach your payment. It’s a 30% tax.

However, that doesn’t bother me. As I just explained, it’s basically exactly where we are right now on a product given their economic data showing 22% of product price is the result of taxation passed along to consumers. You may be saying that if the FairTax was implemented, the $100 item would now cost $130. Perhaps on day 1 as corporations try and exploit society. However, corporations will see the removal of this 22% inclusive tax currently in their products and begin competing on price. Eventually, market pressure will drive their product to a point in which it is level with the previous “real” price. The $100 product will see a price drop to near its theoretical real price of $78. Add in your 30% tax and you’re right back to paying $100 and some change. The authors cite examples and economic theorists to support this “drop in price” of products so our purchasing power is not removed. It will not result as a tax on the current price which includes 22% of inclusive tax already as they state.

Great, we are ok still. We will still pay the exact same amount for products over time and the government still gets their money. This is a short article so I’m not going to go into great detail about how the entire FairTax reform works, but they do have a valid argument. Personally, I believe a consumption tax places the power in the rightful hands. These hands are the consumer, the individual American, and the wage earner. Currently, the power resides in the halls of Congress and our government. We have seen how this power has completely disrupted our taxation laws and rules and our Congress and government are not the most fiscally responsible group to depend on (have you seen the deficits they run?). The money we make should be placed in our hands. ALL of the money we work for. We will still purchase goods and services and a consumption tax is a great way to fund our government without using the phantom withholding tax.

Think about that. You can now decide where your money goes. You are in control of how much tax you pay. If you want to pay fewer taxes, purchase less stuff. If you want to save more, have at it. You are in control because you control your purchase behavior. Currently, the government is in control of your money and you get a percentage to then buy what you want and need and even then, every single product you buy is passing on MORE tax to you. Your effective purchasing power is much less than you might think. However, there are issues with the FairTax. If the prices drop for goods, won’t wages decrease since corporations and business no longer need to pay taxes? Possibly. If there is an influx of money into the economy, won’t we see inflation rise? Possibly. I’m not saying the FairTax is perfect, but it is a very good platform that can be utilized to reform our current failure of a tax platform. The FairTax reform needs in depth study by the economic community and also the government to decide if this could be a “real life” alternative.

Everyone knows we need change, and I believe the FairTax is the most viable alternative to our current withholding system. As with any change, there will be a great debate between the pros and cons and the majority of what you hear will be lies and misdirection. But, we must find an agreeable solution or our taxation laws and rules will end up in chaos (are we far from that now?). People seem to think the IRS and government are too big to take on with such a sweeping new system. The ability to have an income tax wasn’t even in existence until the 16^th Amendment which was passed in 1913. It’s less than 100 years old but people think we cannot change it. If we changed it then, we can change it now. It just takes voter strength and patriotism. We can find a better way and the FairTax is the fork in the road to finding a better way.