An idea to abolish the income tax
From the Blogosphere is an occasional missive of ideas and proposals that you may not have heard of, and that are explored in some detail on the world wide web. The Observer isn’t necessarily endorsing any ideas through The Blogosphere, just encouraging exploration. We asked Rep. Barbara Comstock, who represents Virginia’s 10th District, to weigh in on the proposal.
Each April brings a scramble for people to file their federal income tax returns, and each year the occasion heightens frustrations of people who feel that the system is too complex and unfair. Considering quotes from ultra rich investors like Warren Buffett, who claims his secretary pays a higher income tax rate than he, it’s easy to see why.
For that matter, high-income earners are in an even worse situation. That’s because investment income is taxed at a much lower rate than “earned income” from employment. It’s an irony that earned income is taxed at a higher rate than unearned income.
Perhaps one of the biggest criticisms of the current system is that it over-taxes wage earners who don’t qualify for things like child credits. Or the fact that the mortgage deduction rewards people for buying big expensive houses when it was intended to help people who otherwise could not afford a home. Then there’s the problem of corporations and the wealthy moving their money to off-shore tax havens.
Every few election cycles brings proposals for ideas like the flat tax, in which all income is taxed at the same rate—which is then criticized as being just as regressive as the current system. Then there’s the idea of replacing the federal income tax with a national sales tax—also criticized as being regressive because lower-income people need to spend a greater proportion of their income just to get by.
Over the last couple of years a variation of the sales tax idea has been attracting support—and a lot of attention in the blogosphere. Its supporters, who number more than 40 in the U.S. House of Representatives, think they have found a way to make a national sales tax fair—hence the name Fair Tax.
The essence of the Fair Tax:
A national sales tax of 30 percent (which supporters say actually means a 23 percent tax, according to some complicated math);
A prebate for every taxpayer based on family size and income would be deposited into the accounts of every taxpayer to make it fair;
Abolition of the IRS;
Abolition of every form of federal income and payroll tax, including Social Security and Medicare.
Here is a snippet from the blogosphere of FairTax.org. These are straight quotes, copied here to either interest you in further exploration or get you exercised over the idea.
How does the prebate work?
Under the FairTax, all Americans consume what they see as their necessities of life free of tax. While permitting no exemptions, the FairTax (HR25/S122) provides a monthly universal prebate to ensure that each family unit can consume tax free at or beyond the poverty level, with the overall effect of making the FairTax progressive in application. There is no marriage penalty as the couple gets twice the amount that a single adult receives.
While everyone pays the same tax rate at the cash register, the prebate results in effective tax rates (annual taxes paid divided by annual spending) that increase as the level of spending increases – a progressive tax rate structure. For example, a person spending at the poverty level has a 0% effective tax rate, whereas someone spending at twice the poverty level has an effective tax rate of 11.5%, and so on.
Is the FairTax fair?
Yes, the FairTax is fair, and in fact, much fairer than the income tax. Wealthy people spend more money than other individuals. They buy expensive cars, big houses, and yachts. They buy filet mignon instead of hamburger, fine wine instead of beer, designer dresses, and expensive jewelry. The FairTax taxes them on these purchases. If, however, they use their money to build job-creating factories, finance research and development to create new products, or fund charitable activities (all of which help improve the standard of living of others), then those activities are not taxed.
Should the government tax services?
Service providers are not exempt from the income tax today, and should not be exempt from the FairTax. Services now account for well over one-half of the gross domestic product (GDP). Neither consumption of services nor consumption of goods should be tax preferred. And it is economically foolish not to tax the fastest growing segment of our economy. Competition, not politics, should determine what goods and services cost.
Does the FAIRtax tax used items?
The FairTax does not tax “used” goods but it is important to note that HR25 has a legal definition of the term “used”. This is necessary to ensure that items are taxed only once and to prevent tax cheating.
Under the FairTax, for an item to be considered “used” it must be:
purchased before the FairTax is enacted, or
the FairTax on the item must have been previously paid.
Let’s look at the first bullet above. Assume that Joe bought a new car in January of 2012. Let’s further assume that the FairTax went into effect on Jan. 1, 2013. Since Joe owned the car before the enactment of the FairTax, it is considered a “used” car. It has the taxes from the existing tax system embedded in its price. Therefore, when Joe sells that car to Bill, Bill will not owe tax on the transaction.
Now, let’s consider the second bullet above. The most common example is that Joe buys a new car for personal use and pays the FairTax on it. If Joe then sells his car to Bill, there would be no tax on it because the tax had already been paid. Let’s look at another example. Assume that Joe owns a flower shop business and buys a van to use when making deliveries to his customers. No tax is charged on purchases for business purposes so that the FairTax on goods sold to consumers does not double tax, or put a tax on a tax.
If Joe decides to sell the van to his friend Bill (who is not in business) for use as his personal vehicle, then it would be a taxable sale to Bill. Why? Because Joe did not pay tax when he bought the van for his flower shop. Since no FairTax has been previously paid on that van, it is not considered used and the sale to Bill would be taxable.
If later, Bill decided he did not like driving a van and sold it to someone else, it would not be a taxable sale. Why? Because the tax had been previously paid (when Bill bought it from Joe) making the item “used”; and not subject to tax.
Social Security & Medicare Funding Benefits will not change
The FairTax actually puts these programs on a more solid funding foundation. Instead of being funded by taxes on workers’ wages, which is a small pool, they’ll be funded by taxes on overall consumption by all residents.
Get a Tax Refund in Advance on Purchases of Basic Necessities
The FairTax provides a progressive program called a prebate.
This gives every legal resident household an “advance refund” at the beginning of each month so that purchases made up to the poverty level are tax-free. The prebate prevents an unfair burden on low-income families. Learn more. Pay Tax on Only What You Spend. Be in control of your financial destiny. You alone can control your tax burden. If you’re thrifty, you’ll pay lower taxes than somebody who is not. Most importantly, you’ll be taxed fairly.
Everyone Pays Their Fair Share
Tax evasion and the underground economy cost each taxpayer an additional $2,500 every year! But by taxing new products and services consumed, the FairTax puts everyone in the country at the same level at the cash register. Further, only legal residents are eligible for the prebate.
There are Fair Tax chapters is more than 20 states. The Virginia site is fairtaxnation.com/group/virginiafairtax. Read about the issue nationally at fairtax.org.