An Op-Ed in this morning's Wall Street Journal by Mr. Leo Linbeck of Americans for Fair Taxation explores the proposal for a Fair Tax and discusses the opposition found amongst many in Congress.
First, this concept evolved from a market research study conducted more than ten years ago by a group of business leaders. The study's goal was to determine what type of system to collect taxes would be most acceptable to citizens. The result was a proposal that is now known as the Fair Tax and has been introduced as legislation in Congress.
The Fair Tax calls for a national retail sales tax. This was the most acceptable approach to the majority of Americans and was found to be very beneficial to the economy of our country. It would eliminate income taxes and payroll taxes (for Social Security and Medicare). These taxes are very costly to collect, and are embedded in the cost of everything we purchase. This would rid us of the tax code and the Internal Revenue Service, not to mention many lobbyists and those who make their livings telling those few of us who can afford their services how to avoid taxes.
(Since most states rely to one degree or another on federal tax law and the collection mechanism, this would impact virtually every state in the union. Would life in Wisconsin become more bearable from a tax standpoint?)
Research has indicated that some 20% of all prices we pay today represent those embedded federal taxes. Once those are repealed, the theory is that competition in the marketplace would cause prices to be reduced eliminating that portion of the cost of goods.
This type of tax would also eliminate the imbalance suffered by American producers when competing against the tax-free imports that populate the shelves and auto dealerships. It would also eliminate corporate income taxes and capital gains taxes. And, we all know that a corporate tax simply is passed on to consumers in the final analysis. Again the theory is that our marketplace would become the best place in the world in which to do business.
Many fear that this type of tax would hit the poor and middle class the worst. That wouldn't be the case with this proposal since a "prebate" check would be issued to all citizens to eliminate the impact on the those living in poverty and would give all taxpayers something of a reimbursement for the taxes they'd be paying.
The Fair Tax rate is proposed to be 23% on retail sales. It would raise the same amount of money that the current tax system raises but at much reduced costs. It would be levelled at all consumption at the final point of sale so there would not be the tiers of hidden taxes that we now pay as consumers. It would expand our tax base in that the 'underground economy' would be taxed for all purchases. Illegal immigrants would be taxed as would foreign visitors.
The Fair Tax eliminates all loopholes and tax avoidance gimmicks. It eliminates all deductions. What this would mean is significant. Congress would no longer be able to favor its friends and punish its enemies through manipulation of tax law. Income redistribution and social engineering using tax code would be things of the past.
The paragraph above shows why the 'vested interests' have been arguing against this concept and in favor of the mortgage deduction machinery being permitted to continue, according to Mr. Linbeck. His reasoning, however, is this: "wouldn't it be better for everyone to stop the IRS from withholding from paychecks; to see the price of new homes - and all other goods - drop by removing embedded costs; and to have interest rates fall as the savings rate increases?"
There have been a lot of tax proposals over the years, and most simply nibble around the edges of existing tax code and structure. Our tax system has proved to be a big tool for use by the political class. Witness the latest debates on 'AMT' (the Alternative Minimum Tax that has gotten so out of control as politicians dithered). Our politicians will only get the message if enough citizens let them know this is what is desired. Some candidates on the presidential stump have begun to talk about this.
How does this sound to you? Would you be in favor or against?
