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Understanding the ‘Fair Tax’ (Vol. 79)

Updated: Feb 7, 2023

analyticsbox | Nov 24, 2022


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Most Criticism is from People Who Don’t Understand It


President Jimmy Carter once said, ‘We should light a match to the tax code’. He couldn't have been more right, but then what? The best idea I have seen is the ‘Fair Tax’.

First, what is the Fair Tax?

It is a specific proposal in Congress (HR 25) for a whole new tax program based on consumption. This is not an additional tax, it is one that replaces ALL current taxes and the IRS.

You heard that right, no personal income tax, no Social Security tax, no Medicare tax, no Corporate Income Tax, no inheritance tax. No records to keep, no tax returns to fill out - it simplifies our lives and saves us lots of money and time just eliminating the record keeping and preparation of tax returns. If you make $1,000 per week, your take home pay is $1,000 per week.

So how do we pay for government? The Fair Tax is a consumption tax on all new goods and services for final consumption (i.e. it does not tax sales to businesses). . It is similar to a sales tax and is collected when you pay for the goods and services, and then remitted to the government. The tax rate will be set to provide the same revenue to the government as all of the other taxes that are eliminated. This is 23% of the final sales price.

One criticism of consumption (sales) taxes is that they are regressive. True, if there are no provisions to correct that. There is in the Fair Tax. It is called a ‘Prebate’. This is a cash payment to every family or individual in the country to cover 100% of the tax on a basic level of consumption. It is adjusted for family size. For example, currently the Prebate for a family of 4 would be $661.00 per month (this is adjusted as the minimum expenditures change).

The effect of the Prebate is to make this tax progressive. If the minimum level of consumption is 2,500/month, the Prebate pays 100% of that - there is zero tax to this family. If they spend 5,000/month, the effective tax rate is ½ or 11.5% effective tax rate, , and if they consume 50,000/month, the effective tax rate is 21.7%.

Think about all of the advantages - to name a few:

  1. Cost savings of record keeping and tax preparation for individuals and businesses.

  2. Cost reduction for government by simplifying tax collection and eliminating the IRS

  3. Eliminating very regressive payroll taxes.

  4. Eliminating cronyism built into the tax code.

There are many more, but in the interest of brevity, I will just refer you to their website, fairtax.org for further information.

BOTTOM LINE

Almost everyone agrees the tax code is bizarre and beyond comprehension. The Fair Tax is the best idea I have seen and it dots all the I’s and crosses all the T’s - fair, easy, cost effective, and encourages economic growth.

Take a look at this and get behind the movement.

LEARN ECONOMICS, THEN VOTE SMART

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