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What Is the Fair Tax Act Explained – Pros and Cons

By Holly Mangan

fair tax signAfter the first time trying to prepare and file personal taxes, most Americans learn the same lesson: The American tax system is complex and difficult to understand. Many people also feel that corporations, wealthy individuals and families, and special interest groups have unfair access to loopholes and exemptions that help them avoid paying their “fair share.”

One system that has gained a following in recent years is called the Fair Tax Plan. Simply put, this plan would replace the federal income tax system with a flat national sales tax. Proponents believe this initiative would eliminate loopholes, evenly spread the tax burden, and eliminate hassle without diminishing federal tax revenues.

Opinions vary widely, however, and opponents contend that the Fair Tax Plan would require the middle class to pay the most in taxes, while the wealthy would enjoy an even lighter tax burden.

To figure out where you stand on this high-profile issue, get the facts, weigh the pros and cons, and draw your own personal conclusions.

What Is the Fair Tax Plan?

The Fair Tax Act (HR 25, S 13) legislation proposes that the federal government stop collecting many different types of income tax, including:

Instead, the government would generate tax revenue by instituting a national sales tax on most purchased items. Businesses would collect the tax at the point of sale and send the revenue to the federal government. The IRS would become obsolete, and your net income would no longer have anything to do with how many exemptions you can claim. Instead, your paycheck would simply be exactly how much money you make: tax-free.

Moreover, related legislation would repeal the Sixteenth Amendment, which means the federal government would no longer have the right to levy income taxes. States and local governments, however, would still be able to collect revenue via income and sales taxes at their discretion.

How the Sales Tax Would Work

The proposed sales tax would amount to 23% of the total payment on just about all purchases. Sounds like you’d simply pay a 23% sales tax, right? Not quite. Basically, this works out to be a 30% sales tax rate, because you wouldn’t pay the tax at the register, like you do now.

For example, an item marked $100 would already include the sales tax within it – in this case, $23. This is called an inclusive tax. In other words, the cost of the item without the tax would be $77. But $23 paid on a $77 purchase is roughly 30%, the way we’re used to calculating it. While 30% is steep, you’d be working with a much larger paycheck, because no federal tax would have been withheld.

Further, the Fair Tax plan attempts to solve the issue of double-taxation. Currently, businesses must pay sales tax on the materials they use to create the goods they sell, which then get taxed again. In effect, the same material gets taxed twice. But under the proposed legislation, items purchased directly by businesses could avoid the sales tax and thereby avoid being double-taxed. This should bring the wholesale cost of your purchase down, and, in theory, it should reduce the retail price as well.

Lastly, used items would not be subject to the federal sales tax.

The Prebate

The prebate – or “annual consumption allowance” – is designed in part to relieve poverty-level Americans by providing a monthly check that would essentially offset all of their sales tax expenditures. The amount of the allowance would be based on poverty-level guidelines and would increase for larger families.

Though the prebate is geared toward poorer families, everyone would receive monthly checks, regardless of income. The prebate brings up yet another point of contention between critics and supporters. It is the most expensive element of the entire plan, would be the largest entitlement program in American history, and would constitute a welfare payment, even for those without a need. In other words, a two-parent billionaire household with two kids would receive the same monthly prebate as a two-parent, two-child household struggling to get by on $20,000 per year.

fairtax collection is done at the point of sale

Advantages

The Fair Tax Plan may be advantageous in the following ways:

  1. Favoring High Income Earners. Currently, our tax system is based on tax brackets: The more you make, the more you pay in taxes. Under the Fair Tax plan, only the amount of income you spend gets taxed. Someone who makes $200,000 and spends $100,000, for example, would pay only 11.5% of their income to taxes.
  2. Helping Investments. Because the capital gains tax would be eliminated, individuals who can afford to invest will enjoy tax-free compound growth. This would be similar to having an IRA in which you could invest as much as you want and withdraw funds at any time without taxes or penalties. (Under current legislation, you can only invest a certain amount per year and must be 59 1/2 to withdraw funds without penalty.)
  3. Making Tax Revenues Easier to Predict. Because consumption rates have been much more stable than incomes, figuring out tax revenues will likely be simpler, and estimates will be more accurate.
  4. Benefiting Businesses. Along with eliminating double-taxation, the proposed plan would get rid of payroll taxes and taxes on capital and investments. This change could substantially benefit businesses and buyers, because prices could fall due to increased spending power and lower production costs.
  5. Requiring More Disciplined Spending Habits. It’s apparent from the rampant use of credit cards and the mortgage debt crisis that our country has become far too dependent on credit. The Fair Tax would put an end to this problem, since the more you spend, the more you pay. Moreover, people would likely be inclined to pay off their debt, rather than spend more, since money that goes to credit card bills won’t be taxed.
  6. Eliminating Tax Administration and Filing. Simply put, you’d no longer need to file taxes, and the IRS would close up shop.
  7. Providing Prebates. The monthly check would help offset some portion of every household’s sales tax payments, especially for families near and below the poverty line.

Disadvantages

Scratch the surface of this plan and it falls apart, at least for many of us. Even if forward-looking economists can argue the potential long-term benefits, they don’t appear to be big enough or sure enough to offset the near-term havoc that would be wreaked upon the middle class should such a plan go through.

Major concerns include:

  1. Penalizing the Lower and Middle Classes. Individuals and families that are above poverty level and considered middle-class will bear the brunt of the tax burden for the country. This is a progressive tax, which means that the wealthy pay more and the poor and middle class pay less as a percentage of their income. This expectation will only come true, however, if individuals spend 100% of their incomes on taxable expenditures. Taxpayers – especially wealthier citizens – are not likely to choose to live paycheck-to-paycheck. The wealthy won’t likely trade investing for spending anytime soon, so this plan would indeed be regressive – meaning those with less money will end up paying a higher percentage of their income in taxes.
  2. Increasing Potential for Tax Evasion. Such a high sales tax rate would undoubtedly lead many to evade the tax, possibly through trade and purchasing goods in other countries.
  3. Decreasing Overall Spending. Under this proposal, the best way to lower your tax burden will be to spend less. Too little spending is not good for any capitalist economy. In fact, while many current tax incentives are specifically created to drive consumer spending, the large sales tax could discourage consumers from spending freely, thus hurting the economy.
  4. Eliminating Tax Deductions and Credits. Many people derive significant benefit from common personal tax deductions, such as the home mortgage interest deduction, the child and dependent care credit, education credits and deductions, and the earned income tax credit – not to mention the ability to deduct medical bills and expenses and student loan interest. The cost of home ownership, then, could significantly rise for homeowners who currently itemize and have large interest payments. Renting would become even more appealing, and an already ailing real estate market could be devastated.
  5. Making State Income a Bigger Burden. Though federal income tax would go away, state income tax would remain, and of course it would no longer be deductible against federal taxes. The effect would be a great burden on residents of high income tax states like California. Moreover, unless you live in a sales tax free state, like Oregon or New Hampshire, you could pay your state’s sales tax on top of the Fair Tax and on top of your state’s income tax. For a family living in Los Angeles making $100,000, this would be well over 40%!
  6. Depending Too Much on Spending. Paradoxically, this tax is dependent on spending, but at the same time discourages it. Plus, since many wealthy individuals already invest on their own and in other businesses, they may be further motivated to do so. Those moves could benefit the economy overall, but since these activities would be non-taxable, the national burden shifts to the lower economic classes.
  7. Increasing Costs for Immigrants. The prebate check system will not include non-citizens, significantly raising the cost of living, especially for lower-income immigrants, permanent residence (“green”) cardholders, and visa holders. It could also deter highly educated foreign workers with great careers, such as doctors, engineers, and technology sector workers, from immigrating.

determine what the fairtax would mean for you

The Fair Tax Act and Inclusive Taxation

The Fair Tax Act may attempt to improve the current system, which favors the wealthy with loopholes and big deductions, by replacing it with a more equitable system of taxation. However, this may not be the case. While the downsides are troubling, what is most disturbing is how advocates present the plan.

First, let’s quickly review the current sales tax and what the change would mean. Everyone in this country is accustomed to paying what’s called an “exclusive tax” on their purchases. This means we see how much an item costs and then calculate the tax on top of that price. In fact, until I read about the Fair Tax Act, I didn’t know there was any other way to pay sales tax.

Since this is the crux of the Fair Tax plan, it’s worth addressing again. If you purchase an item for $100 that has a 23% tax, you would expect to pay $123 total. This would be an exclusive tax. However, the Fair Tax plan calculates their tax as inclusive. In other words, your $100 purchase already incorporates $77 for how much the item costs and $23 for the actual tax. But a $23 tax on a $77 purchase comes out to 30% the way we currently measure it.

In explaining the plan, it seems that Fair Tax proponents call it a 23% tax so the plan sounds better. And this makes me wonder, what else are they spinning, and why do they misrepresent a crucial aspect of their plan in the first place? If the people vetting the tax plan don’t understand why it’s misleading to talk about an inclusive sales tax, then I suspect other aspects of the plan will be misleading and possibly flawed as well.

On the other hand, if the ruse is intentional (which seems like the rational explanation), what else are they trying to sneak past us, and why? As if the length of the list of cons isn’t enough, this simple bit leads me to suspect that the Fair Tax is anything but fair, and that it’s just another ploy to get the rest of us to pad the pockets of the upper and corporate classes.

What Does It Mean for You?

The Fair Tax is gaining traction because many people feel that our current system of taxation is unfair. But though it claims otherwise, this plan is no different.

Consider that many families can currently get their effective federal tax rate down far below 23%. I have a five-person family: two adults and three children. Our effective tax rate was 8.91% last year, and while we aren’t near poverty level, we are not considered remotely wealthy. Of course, we have a mortgage and private mortgage insurance, plus one child in college, two in elementary school, and plenty of student loan interest. In other words, we have a lot of deductions to lose if the Fair Tax goes through.

Take a look at your tax return to find your effective tax rate. If you use a service like TurboTax or H&R Block, it should be listed on the first page. How much more (or less) would you pay under the Fair Tax plan? If you don’t have children or a mortgage and you have a good salary, your tax rate may be fairly high. But do you ever plan to have a mortgage or children? And how do you feel about the middle class taking the brunt of this tax plan to keep the country solvent – regardless of whether or not you’re in that class yourself?

Take this into account and think about how much more or less you’d pay when deciding whether or not you think the Fair Tax is truly fair.

Final Word

A lot of us are looking for change – the kind of change that will bring our country back to its glory days, or at least give more of us a fair shake at being comfortable and successful. And because of that, it can be easy to believe whatever our favorite politician says without properly evaluating the facts. It’s happened to me and I’ve been sourly disappointed.

As responsible citizens, we need to examine the facts of the Fair Tax ourselves. One place to start is to look at who’s sponsoring the bill. What’s their history and what have they supported in the past? This can give you an idea of their motivations and who they really serve – the people or special interests. Just don’t take my word for it or anyone else’s. The best way to create a truly equitable system of taxation is to demand hard facts over catchy soundbites and empty promises.

What are your thoughts on the current system of taxation? Do you think the Fair Tax will effectively address these problems?

(photo credit: Shutterstock)

Holly Mangan
With a passion for accuracy and a background in finance, Holly Mangan has found a home with Money Crashers as Managing Editor. Her office mate and constant companion, a 12-year-old pit bull terrier, barks his approval of particularly pithy phrases or howls admonishment if she works too long. When not scrutinizing articles, Holly enjoys hanging out with her children, as well as cooking, being outside, and not really being a wine snob. A treasure hunter at heart, she believes everything we want and need is right in front of us, just waiting to be found, and that the same goes for life as it does for editing - doing it well is all in the details.

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  • http://enoughwealth.blogspot.com Ralph

    We sort of got half of this in Australia when we got the GST (goods & services tax) – similar to the UK VAT, or your state sales taxes.

    Our rate got set at 10%, not 23%, so our income tax rates only got cut, not eliminated, the tax free threshold raised, and state stamp duties eliminated (eventually).

    To get the legislation passed some items had to be exempt – eg. basic (unprocessed) food, water. Which meant it didn’t raise as much revenue as originaly intended.

    In practice it seems to not be as progressive as most people had imagined – poor people tend to spend more of their income on taxable items (junk food, beer, cigarettes etc), while rich people spend a smaller percentage of their income on taxable items (wine, caviar, sports cars) and can save/invest more – which isn’t taxed until it eventually spent.

    It was also supposed to help stamp out the “black” economy, but instead there has been a proliferation of “cash in hand” deals and bartering to avoid paying the GST.

    • Keith Reynolds

      The fairtax only similarity is that it is a consumption tax. But though the lens of consumption even an income tax looks like a convoluted tax on consuming domestic made products.

      The Fairtax covers the taxes that is spent on basics necessities with the prebate so there is no need for exemptions. The fairtax has a broader tax base by taxing consumption of all new products and services to raise the necessary revenue. The prebate is beautiful this way every family is treated the same. poverty level spending inclined food and housing. The fairtax is progressive on spending.

      There will always be people that try to cheat taxes but lets look at the risk / benefits of tax cheating as we switch to the Fairtax.

      In order to make a clear comparison on tax evasion issues between the fairtax and our present taxes, I will quote the fairtax inclusively as is the income tax.

      America’s 15% self employment tax, is really nothing more then the combined value of both the employer payed and employee payed payroll taxes. A proprietor who falls into a 8% income tax bracket has a total tax liability of 23% of his income. Most proprietors tax liability is well above 23%. The fairtax is 23% of consumption. The rate doesn’t indicate that there would be more or less tax cheating to a proprietor that would be classified into an 8% income tax + 15% self employment tax.

      The unregistered self employed individual pays the fairtax in his purchase of supplies and tools. The fairtax will be partially embedded in the cost to the tax cheater’s consumers, resulting in less of a negative impact on revenue to the Treasury, and decreases the rewards for tax cheating. Further more a system of fines and rewards will help keep unregistered tax cheats down. Looking at the risk and benefits there will probably be fewer unregistered tax cheats.

      The registered self employed individual supplies his tax payer identification number in order to purchase equipment and supplies as an intermediate sale, (no tax levied). Just as an audit under the income tax catches tax cheats, so will it be under the fairtax. With the fairtax, there will be 86% fewer tax filers and the audits can be done much more efficiently. Policing under the fairtax is much easer. The risk of tax evasion to registered businesses increases while the reward is no better then it was with the income tax.

      • Terry Pratt

        Re: “The Fairtax covers the taxes that is spent on basics necessities with the prebate so there is no need for exemptions.”

        Um, the prebate DOES NOT “cover the taxes that is spent on basics necessities”

        This will take some explaining, but the short answer is that the poor have a much different spending profile than the middle class and the rich, and their spending profile causes them to pay more tax than the prebate would give them.

        Specifically, most poor renters spend at least half their income on rent, and all of this rent is taxed. The problem is that rent is a service, not a good, and rents will not fall the same way prices of goods will fall.

        Because rental property currently enjoys favorable treatment under the income tax, there is little income tax embedded in rent. There is a great deal of property tax embedded in rent, and property taxes are not affected by FairTax.

        Therefore, landlords won’t enjoy huge cost reductions under the FairTax, and post-tax rents will rise substantially.

        All those poor renters spending half their income on rent will pay more in FairTax than they will receive from the prebate. Therefore, their spending and consumption MUST FALL.

        • wjones4iv

          If I am understanding this corrctly, you are claiming the prebate will not cover the basics for poor renters. How much will the prebate be? I have not read anywhere how much the prebate will be and before I can make an informed decision I need to know that information. I am assuming you know how much the prebate will be under the faor tax plan because you seem adamant about it not being enough to cover the basics for those renting. Another piece of information needed is will the prebate differ depending on your market? Will I get more if I live in NYC versus living in a lower economic area of the USA?

        • http://www.facebook.com/people/Henry-Salo/1394713777 Henry Salo

          The orebate will be $209 a month, single person, $418 a month, married couple and children $76 per child. Not enough to cover basic necessities.

        • Tracy A. Goode

          Prebate is $220 for a single person, $440 per couple, $76 per child–and you pay NO taxes until you SPEND more than $27,000 if you are a two parent household with one child. Much better than the 13% hidden taxes you pay right now.

        • Henry Salo

          The so called prebate is nothing but an entitlement which will cost between $400 billion to $700 billion a year to process and handle. This will be the largest entitlement ever. Eliminate the prebate and lower the tax rate.

        • Tracy A. Goode

          If it’s an entitlement, it’s one that is available to ALL LEGAL RESIDENTS, rather than a select few. Do you think that the deductions you get now for yourself, your wife, your children are not entitlements, too? That is what the Prebate is–it is a deduction–the ONLY deduction allowed under the Fair Tax–and is given to everyone regardless of their income. What can be more fair than that?

        • Henry Salo

          Tracy, you are a complete fool when you wrote that what can be more fair than that. Look at the people who will get this prebate. Anyone with legal S.S. numbers will get a prebate. From Bill Gates to the poorest person will get a prebate. Drug dealers, criminals who are out, gang members, hookers or whatever will get a prebate whether they buy something or not. A deduction is set on the tax rate of your income if you have a family while a prebate is sent out whether you need it or not. It’s an entitlement. A total waste. Guys like Bill Gates or other billionaires don’t need a prebate. And you call that fair? It’s a laugh.

        • http://www.facebook.com/people/Henry-Salo/1394713777 Henry Salo

          I misspelled prebate with orebate.

    • Terry Pratt

      Question (for all readers outside USA): does your VAT apply to rent…do renters pay VAT to their landlords?

  • Jacquelyn Hart-McCoy

    I have thought about this a lot and I think it is probably a good idea. I have no idea why some people think it won’t help the poor. It would absolutely help the poor! They would have more money for things they need like food! (Which is not taxed.) and Housing! (also not taxed if you are a renter)
    My one big concern is what you said about it slowing the economy. It may, or it may not but I do know my spending habits would remain the same. I buy things when I need them, and that’s that. Whether they are going to have a huge tax associated with them or not.

    Thanks for bringing up this important topic.

    • Terry Pratt

      Under the FairTax, food and rent are definitely taxed. Wherever did you get the idea that they are not?

      • Tracy A. Goode

        They are effectively untaxed–based on how much you spend and what you buy. Untaxing food altogether would not be fair; someone with $100,000 a year can afford more expensive foods like steaks, while someone with $10,000 is stuck with hotdogs. That the person with $100,000 a year may buy hotdogs to save money is a purchasing choice–something the Fair Tax allows us to do.

  • Keith Reynolds

    Re cons
    “It could discourage the country to spend, which ultimately hurts the economy. ”

    Switching to the fairtax will cause an increase in consumption of American made products hear and outside our borders

    “It has not been proven that the fair tax would supplement the current tax system dollar for dollar”

    People opposed to the fair tax worry that it will not benefit the poor.
    That would be like saying the income tax helps the poor which it certainly does not.. Instead they are raped blind by politicians with hidden cost of corporate taxes, employer payed portion of payroll, self employment tax and other taxes that consumers of American goods pay. And don’t forget very regressive employee payed payroll taxes against their income. Switching to the fairtax completely untaxes their poverty level spending

    • Terry Pratt

      A lot of people (esp conservatives) complain that the poor currently get millions of dollars in “free” money through the Earned Income Tax Credit. The EITC certainly does benefit the working poor. Under FairTax, the EITC disappears, and virtually all their income becomes subject to a national sales tax (the poor spend nearly all their income on items (like food and rent) which are taxable under the FairTax.

      Since most poor Americans spend at least half their income on rent, and rents will rise substantially under the FairTax (the largest tax embedded in rents is the property tax, which is unaffected by FairTax), the prebate will be insufficient to cover their increased costs, and their spending and consumption will necessarily fall.

      It would be great is someone could explain how the FairTax benefits the poor and near-poor who cannot buy a home and therefore must rent.

      • Tracy A. Goode

        Under the Fair Tax, just like every other legal resident, the Poor are eligible for the Prebate up to the Poverty Level for their family size. This actually DROPS the amount they pay in rent as a percentage of their income. If you have a family of 3, Single mother with two children, spending $19,000 a year, the Prebate is $374 a month, or $4,420 a year (One person @$220, with 2 children @$67/ea.). If that mother is currently making $19,0000, she pays, with deductions, nothing right now–except that she pays the payroll taxes and compliance costs of every company that helps produce the box of twinkies she buys, and thus actually pays about 14%. That means, of her $19,000, she actually has only around $16,500 real purchase power. Under the Fair Tax, of her $19,000, she pays no taxes. She would actually have to SPEND another $500, roughly, to pay ANY taxes. That’s a difference of $2,500 from the current system–allowing her more money for her rent. Add to that that she could SAVE that money and eventually become a home OWNER–and it’s a win/win situation.

  • marylandterps

    The Fair Tax would raise the costs of good about 33%. If that is not bad enough, there is no guarantee that the Federal Government would not later impose the income tax again (when they wanted more money). Then we would be taxed twice. Collecting this tax would also be a nightmare, the retailer would have to deal with this & probably raise prices b/c of this.

    The real solution is to shrink the size of government & to impose strict controls on its future growth.

    • Erik

      maryland, you need to research the fair tax more, because it would not raise the price 33%.

      When you buy something right now, there is already about 23% worth of taxes built into that price from the taxes that retailers, distributors, and manufacturers have to pay to get that product to you.

      if you eliminate all of those taxes, companies will be forced to lower their prices due to the law of free market economics. One company will find a competitive edge by lowering their prices and the others will follow suit. They won’t collude, because there’s so much incentive for the company with the weaker market share to lower their price if it’s costing them 23% less to deliver that product.

      You do have a good point about the federal government still passing an income tax later on down the road. But, we as citizens would have to make sure this didn’t happen. We are the ones that elect gov’t officials, so we would have to put in place those that believe in what is working. Plus, if the fair tax DID work well and everyone was liking the fact that they never have to deal with the IRS again, then no sane politician would vote for another income tax.

      • Hank Van Gieson

        Erik,

        While I agree with you that retail prices probably won’t rise by 33%, you need to understand that if we all get 100% of our gross pay/pensions, then the best businesses can do by eliminating business tax related costs is around 10%. Remove 10% and add 23%, (not 23%), and retail prices will rise by 17% on average.

        • Keehead

          Erik is right. Molly is forgetting two very important advantages of the FairTax.

          First, she leaves off the taxes that are already in the prices of the products we buy. No corporation worth its salt excludes the taxes it will have to pay into the cost of the product they are selling. Corporations pay a 35% tax rate in the U.S. (one of the highest in the world). Since they know what they’re doing, they pass that tax on to those who buy their products. For example, if I want to make 30% profit on an item, I must add 35% of that profit on to my cost since that will go to taxes. All businesses do this. Corporations don’t pay any taxes – ever. They just make sure to collect them from their customers. The Fair Tax eliminates corporate taxes, therefore the prices of goods (thanks to competition) will actually drop, reducing everyone’s tax burden.

          Second, dropping the corporate tax will create an incredible amount of foreign investment into the U.S. market. We will basically become a tax haven for corporations like the Bahamas or Monaco are today. These investments will bring jobs and money into our economy, money that will be spent in thousands of ways, thus increasing our tax revenue beyond anything we could imagine today. In fact, I predict this would cause such a surplus in our federal budget that we would quickly pay off our total debt, then have to lower the fair tax when the government coffers start overflowing.

          The FairTax is a no brainer, just based on these two massive arguments.

    • Concerned Citizen

      Well don’t think for a moment the government couldn’t keep the same tax system and add value added tax to sales anyway. It think we need flat tax for everyone.And I am by no means rich.By most standards I’m some where between poverty and middle class.

  • pharmboy

    I’m all for repealing the 16th and enacting the FairTax.

    Taxes do two things. They generate revenue and they affect behavior. The federal income tax generates billions in tax revenue but does it at the expense of discouraging work.

    I’m an example of this. Thanks to the highly compensated employee clause of the IRS’s 401(k) regulations, I purposely asked my boss to let me only work 36 hours per week so that my pay would drop and I could pay less in taxes by investing the full 15.5K in my 401(k). I chose to work less because of our tax system.

    The FairTax would stop punishing the most productive Americans and it would save us billions in wasted time filing taxes in the atrocity of a tax code that we currently use.

    • Erik

      I couldn’t have said it better pharmboy. it discourages people to work more, because working more for hourly workers means they’ll be put into a higher tax bracket.

      We spend BILLIONS every year spending money to file our taxes, and it can all be changed by heavily taxing spending, rather than productivity.

      Also, for those of you who haven’t researched the fair tax, it would send you a pre-bate every month to reimburse you for taxes you incur for necessities such as food and household goods.

  • MJS

    How does the US match up with other countries when it comes to taxing? Are other countries taxing like the FairTax or how we traditionally have been taxed? Not that that would be the decision maker but I’m just curious.

    • Hank Van Gieson

      MJS,

      Over 130 nations worldwide use a VAT which is another form of a consumption tax. The only difference between the Fairtax and a VAT is that the Vat is collected in small chunks at each level of production, while the Fairtax is collected all at once at the retail cash register. Both collect the same amount of revenue at the same rate. Experience shows that a VAT will likely have significantly lower evasion due to the “self policing” nature of the collection process. It is a mystery to me why we are the last developed country not to have a VAT. Could it be the NIH factor?

  • Farmer

    I am heavily in favor of the FairTax – it is a comprehensive tax reform bill that not only will fix the IRS, but stimulate our dying economy!

    • Terry Pratt

      Is the FairTax fair to people who cannot buy a home and who therefore must rent?

      • Tracy A. Goode

        Yes. With the Prebate, un-taxing families up to the Poverty level for their family size, rent actually in many cases becomes lower, allowing renters more options in where they live. Add to that the ability to SAVE more, and more Renters may find themselves able to buy their home.

  • Ken Faulkenberry

    I think your analysis of the Fair Tax is unfair. Yes, if you have gamed the system by using all the loopholes now in the system you can get your tax rate very low. But is this fair? Why should some pay less taxes because they borrowed money for a better home, or have children, etc. The Fair Tax would end this gaming of the system by eliminating loopholes and treating everyone the same. It will remove the disincentives to produce income and create jobs! Our current tax system rewards debt and discourages production. How dumb is that?

    • http://www.moneycrashers.com Holly

      Ken, it’s not gaming the system when you use legitimate deductions and credits. These credits and deductions, by the way, have helped my middle class family live in a decent home, have helped me to afford a college education for my stepson and daycare for my children so I can work. Those are hardly disincentives to produce income and create jobs.

      • Ken Faulkenberry

        Holly, I apologize if I used the wrong term. I wasn’t trying to make it personal. Everyone should try to pay the lowest tax possible. My point is the system is unfair. If one person is getting a tax deductions because they borrowed more money than another person who paid cash; that is unfair and partially caused the latest bubble in housing. People leveraged and were given incentives to do so by the tax code. Meanwhile the person who was frugal with their money and paid cash has to pay a higher income tax to subsidize those who borrowed heavily to buy the same home. That is fundamentally unfair! Why should I have to subsidize someone elses daycare, or college education, or better home than I can afford just because I don’t borrow the money?

        • http://www.moneycrashers.com Holly

          No worries. Different points of view are what keep the conversation alive and inspired to find the best solutions for all. And you’re right, the current system isn’t fair – we agree there. :)

      • Cuddly_25179181

        Holly,
        I hope this doesn’t come off condescending but here goes..

        Your home, do your fellow tax payers stop by and spend the night? people youve never met? – no? why should their tax dollars assist buying your home?

        Did other tax payers FORCE you in anyway to have children? no? why should their tax dollars go to assist supporting them?

        Its not that I personally don’t care, I just feel its very unfair that for the responsible people (not saying you arent/werent) that build careers, stay single, make sacrafices to progress their career etc are typically the hardest taxed because they dont have ‘Loop holes’ because they were fiscally responsible and independant…

        Besidies for the ‘working poor’
        http://en.wikipedia.org/wiki/Fair_tax

        you get alot if not all of that money back every month…basically making you untaxed as its returned to you.

        Don’t like renting? well your money isnt getting taxed unless you spend it…save it, buy that used home, see how much youd save monthly on taxes and start saving that in a seperate pot for home improvements? or guess what a nicer home?

      • Yauy

        I believe it was the productivity of the individuals in your middle class family that gave them a decent home, etc…

        The native extreme unfairness of the current tax system is what produced all the necesity for excemptions, deductions and credits. Otherwise the people would have revolted against the system; as some allready have.

        • http://www.facebook.com/chuck.kill Chuck Kill

          People who have paid into the Social Security system and private savings accounts for retirement will be effectively double taxed when they begin withdrawing their money and spending it, because all the money that they have managed to save up has already been taxed by the present tax system
          The fair tax will NEVER pass unless Congress protects all savings that have been previously taxes. Why should everyone who have saved their money get taxed twice, when those who spent their money do not.

        • Yauy

          THE REBATE, remember. And maybe yes, a provision could be made to not double tax existing savings.

        • Tracy A. Goode

          People who have paid into Soc. Security are ALREADY being retaxed on it. From the Fair Tax website:

          “Are seniors taxed twice on savings, once when they saved it, and now again when they spend it?

          Simply put, the FairTax is a revenue-neutral proposal, raising no more money than does the current system. The FairTax only changes where the money is raised, not the amount.

          Additionally, some erroneously believe that people who have invested in Roth IRAs will never pay taxes on this money again. They may not know it, but they are paying corporate income taxes, employer payroll taxes, plus the associated compliance costs that are hidden in the price of every retail purchase they make. Under the FairTax, these hidden taxes
          are driven out of retail prices. And note, they can determine the amount of tax they pay through their own lifestyle choices.

          Furthermore, used goods are not taxed because they have already been taxed once — when they were new. Therefore senior citizens, like all Americans, do not lose purchasing power, but gain it instead. Moreover, the FairTax preserves the purchasing power of Social Security benefits, and seniors receive a monthly prebate so they don’t pay taxes on the
          purchase of necessities. Tax-deferred investments get a one-time windfall. Savings invested in any long-term, income-generating asset such as a stock, real estate, or a long-term bond that can’t be called, increase substantially in value. Finally, complex estate planning is an artifact of an earlier age.

      • Tracy A. Goode

        Holly, those deductions and credits are unfair to others who have worked just as hard and are unable to take advantage of them. The Fair Tax, on the other hand, allows everyone to make the choices that are best for their family. Why should I subsidize YOUR house with the mortgage deduction? Why should I, subsidize someone who is taking advantage of the Earned Income Credit–which is not available to me, my children being grown, and that I was never able to take advantage of because I made too much money–or not enough? Where is MY incentive to be productive under the current system? There is plenty of incentive under the Fair Tax, not to mention plenty of incentive to make wise buying choices.

  • Tommy Z

    I support the FairTax mainly because the income tax is that much worse. Just think, if you trade an apple for an orange with your friend at lunch, there is no capital gain and there is no tax. When you trade your time for wages, there is no capital gain…but there IS a tax. This is akin to saying we do not own our own bodies and when we trade the use of them for something else (like wages), we have a taxable gain.

    “Paradoxically, this tax is dependent on spending, but at the same time discourages it.”

    You mean like the current system we have now? All taxes discourage whatever it is that is being taxed.

  • Michael

    Having written tax policy at the state level in a former career, a few things pop out. First, sales taxes are notoriously regressive – that is, they impact poor people harder and rich people less, when compared to most other forms of taxation, and when compared to income taxes with a progressive rate structure in particular. The Fair Tax proposal would clearly result in a massive upward shift in after-tax income. This is particularly problematic at a time when income inequality is historically extremely high, and the non-elite classes are suffering the full brunt of a near Depression while elite incomes continue to soar.

    Second, the current economic slump is demand-driven. That is, there is significant existing productive capacity that is currently idle – about a trillion dollars annually by most measures. And corporate balance sheets are at an all-time high. Companies are sitting on big piles of cash that they are choosing not to invest, and productive resources that they are choosing not to ramp up, because the lack of demand makes it unlikely that such investments would produce the desired return. Under such conditions, shifting to a tax that disincentives consumption (i.e. depresses demand) is the last thing we need. And yes, sales taxes discourage consumption, by making it more expensive to spend money. The possibility that incomes would rise does not alter the way these incentives work. To those who lament that income taxes create “disincentives to produce income and create jobs,” you are missing a very basic economic concept: Income does not create jobs unless it is spent. If people make more money but simply sit on that money, no economic activity results, and no jobs are created. So income is not something that needs to be incentivized. Spending is. People need to buy cars, and airline tickets, and nice dinners out, and furniture, and all the other things that they don’t think they can afford right now. A massive sales tax on all these things is exactly NOT what the economy currently needs.

    Finally, you have to be skeptical of any proposal that has serious dishonesty built into the proposal itself. The rate for this tax is not 23%. That claim is a deliberate misrepresentation by its authors. As I mentioned, I used to write tax policy. Nobody, and I mean NOBODY, speaks of sales tax rates on an “inclusive” basis. That is not just a “different way of measuring” the rate, as if tax policy professionals use two methods of measuring, each equally common. Not at all. This “inclusive” way of measuring, as far as I can tell, was invented by the advocates of this tax to make the rate look lower than it really is. What else have they misrepresented? Have they used “dynamic scoring” to project larger revenues than the tax would actually generate? How have they determined that their proposal would be revenue-neutral – a claim that seems facially implausible in light of the rates for the taxes that would supposedly be replaced? Why have pains been taken to disassociate this proposal from the Republican Party and other forces on the right, who certainly lack credibility regarding the fairness of their tax policy preferences? It’s obvious that to anyone with any political acumen that that’s where it comes from.

    • Charmazova

      why would people “sit” on their money? Sure, think more about spending becasue your taxed that way- but I really don’t think Americans have a problem with not spedning enough- we spend money we don’t have for heaven’s sake. When we have more money in our pockets under this system, I don’t see why people woudn’t spend it- the only reason people save money is to save it up to buy something. I think the pro of not spending money on credit becasue of the added cost of the tax is a great pro- our excessive use of credit in this country has driven inflation like crazy.

    • showard351

      First of all, the Fair Tax is not a sales tax. It is a consumption tax. You will never see it in the price of the goods and services that you purchase, just like you never see the income tax that the producer pays now. The Fair Tax would be included in the price by the retailer.

      Second of all, all the dollars parked off-shore now for tax reasons will come back in this country. How is that not going to help the over-all economy?

    • Tracy A. Goode

      Are you an economist? An accountant? Have you actually STUDIED the Fair Tax? Do you not understand that the Prebate makes the Fair Tax progressive? The more you spend, the more you pay?

      I have seen accountant after accountant after accountant promote the Fair Tax. It was developed by economists and studies have shown that it will produce MORE tax revenue than the current system does, since it captures the taxes of illegal activities, illegal residents, and under the table employees that are currently missed–and that people spend more when they HAVE more.

      I am skeptical of anyone who claims to have written tax policy and is not an accountant or an economist.

  • Terry Pratt

    Nobody has yet specifically noted that services would be taxed under the FairTax. This includes rent, which means that renting would become less appealing than buying an existing home – purchases of new homes would be taxed but purchases of existing homes would be exempt, while ALL rent (new or existing home) would be taxed.

    Similarly, property taxes paid directly by a homeowner would not be taxed, but property taxes embedded in rent would be taxed. So-called “imputed rent” – the equivalent rental value of an owner-occupied house – would not be taxed, thereby allowing homeowners to enjoy over a trillion dollars annually of untaxed consumption. The tax benefits of owning a home would be even greater under the FairTax than they are under the current income tax, and massive sums would be redistributed upward from renters to homeowners. (The redistribution would be upward because median renter income is below 50% of median homeowner income.) My calculations suggest that over a lifetime, a renter could pay five times more FairTax on their housing consumption than a homeowner would pay in the same home. An underclass of rent slaves – burdened by higher taxes but unable to escape them – would emerge.

    Because rental property is currently afforded favorable tax treatment, there is little income tax embedded in rents, and thus landlords would not enjoy substantial cost reductions under the FairTax. This means that there is little potential for rents to fall, therefore post-tax rents would rise substantially under the FairTax.

    Because most low-income renters spend at least half their income on shelter, rent increases under the FairTax would outweigh any cost reductions on goods purchased. Therefore, while the prebate sounds good on paper, it would be insufficient to offset actual FairTax borne by low-income renters, whose purchasing power, spending and consumption would necessarily fall..

    It would be one thing if I chose to rent – then paying the FairTax would be voluntary. But as long as I do not rent by choice, I am unwilling to pay an explicit tax penalty for the inability to buy a home.

    • http://www.moneycrashers.com Holly

      Excellent point. It’s hard to deny this tax would be extraordinarily regressive once you start taxing rent.

      • showard351

        You get to keep your whole paycheck. You get a prebate at the first of every month. Your rent will not go up. How is it not better?

      • Tracy A. Goode

        Holly, the Prebate covers that. By allowing every LEGAL resident up to the poverty level for their size family a tax advantage, paid prior, those rents come down. However, the more money you spend, the less that prebate benefits you, regardless that you are eligible for it. Granted, you would have to SPEND $4,000,000 under the Fair Tax to pay the full 23%, or be here illegally, or be a visitor, but you pay based on your choices. Could you REALLY see Warren Buffett living in a single wide trailer in order at that point to pay less taxes than his secretary? I can’t.

    • Yauy

      Here we are talking about low income renters who cannot buy a house.

      They get the benefit of the prebate.

      But, what is the entry level for a person to have enough income to buy their first house?

      Like, what is the cheapest house a person can buy?

      Of course a poor person cannot buy a midddle class house. But a person in America usually does not remain poor for ever. Through hard work, study and perseverance Americans usuallly improve their lot.

      I’ve seen poor people living in used trailer homes. They would be able to buy one of those and be totally tax free. That’s a good start. Then sell that and move to something better, and so on, as it is usual.

  • Anonymous

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  • James C.

    Even though I am a Fair Tax supporter, even I will admit that it’s not perfect and has flaws. However, I’d like to bring up the point that the article calculates the tax on a $100 item incorrectly. The article switches from exclusive to inclusive tax without altering the parameters of the equation, thus misleading the reader. Let’s look at what’s stated in the article:

    “If you purchase an item for $100 that has a 23% tax, you would expect to pay $123 total. This would be an exclusive tax. However, the Fair Tax plan calculates their tax as inclusive. In other words, your $100 purchase already incorporates $77 for how much the item costs and $23 for the actual tax. But a $23 tax on a $77 purchase comes out to 30% the way we currently measure it.”

    Under the FairTax, an item that sells for $100 would get a 23% tax on it, making the item $123 if we calculate an exclusive tax. That much is true.

    When you switch to inclusive, you don’t subtract the $23 from the $100 to get a $77 base price. The $23 tax is calculated as an exclusive tax based on the item’s base price of $100. Why would you subtract an exclusive tax you derive from an item to establish its new base price to then establish the inclusive tax? It doesn’t make sense and it doesn’t work out mathematically.

    If you want to calculate how much an inclusive tax of 23% would be, you must find out how much that item is without the 23% tax. So let’s do some basic algebra.

    .23x + x = 100
    having x = to the base price of the item.

    When you solve for x, the item costs $81.30. Add the 23% Fair Tax of $18.70 to that price and it becomes $100. Recall what your old algebra teacher said long ago – “check your math backwards and forwards”. Ok, why not!

    Exclusive Tax:

    $100 item at 23% tax = $123 total.

    100 times 1.23 = 123. (or 100 + (100 times .23) = 123).

    now reverse it:

    .23x + x = 123
    1.23x = 123
    x = 100

    Inclusive Tax:
    Item total = $100. find base and tax based on 23%

    .23x + x = 100
    1.23x = 100
    x = 81.30

    now reverse it:
    81.30 times 1.23 = 100. (or 81.30 + (81.30 times .23) = 100).

    • http://www.moneycrashers.com/ Holly

      James, I absolutely understand where you’re coming from. The inclusive vs. exclusive tax is quite hard to get one’s head around. And first off, I want to make it clear that I understand your numbers and have no problems with basic or even advanced algebra. That’s not where the problem is in your analysis. The problem is before that point – it’s the premise on which you base your calculations. Here:
      A tax-exclusive tax rate refers to the amount of tax paid as a proportion of the pretax value of whatever is taxed; sales tax rates are typically expressed in tax-exclusive terms. A tax-inclusive rate, conversely, refers to the AMOUNT OF TAX PAID AS A PROPORTION OF THE AFTER-TAX VALUE; income tax rates are often expressed in tax-inclusive terms. Thus the difference between the two definitions is whether or not the tax paid is included in the denominator when calculating the tax rate. http://www.taxpolicycenter.org/briefing-book/improve/retail/exclusive-inclusive.cfm

      That’s from the Tax Policy Center. What you actually arrived at in your last calculation is the exclusive tax – you just called it inclusive. You didn’t calculate tax off the after-tax value (100), you calculated it off the pre-tax value (81.30), which you arrived at by using basic algebra. But they are two very separate calculations and not just a matter of semantics.

      $100, 23% tax, calculated exclusively: .23 x $100(pre-tax amount) = $23, you pay $123 total.
      $100, 23% tax, calculated inclusively: .23 x $100(post-tax amount) = $23. But you still pay $100 total. Then, by simple math, to arrive at the purchase price sans tax, subtract $23 from $100. You get $77. A $23 tax on a $77 purchase at the store represents a 30% sales tax.

      I hope that helped. Here are a few more places to go to get a little further insight if you’d like:
      http://en.wikipedia.org/wiki/FairTax
      http://www.forbes.com/sites/nathanlewis/2011/10/13/flat-tax-vs-fair-tax-vs-herman-cains-9-9-9-plan/

    • punatic

      it’s totally flawed on face…….don’t fall for this huge lie!

  • FairTax Advocate

    Holly needs to heed her own advice. “To figure out where you stand on this high-profile issue, get the facts, weigh the pros and cons, and draw your own personal conclusions.” by doing a more thourough job of getting the facts. There are many mis-statements here although in general she has a better than average grasp of the FairTax.
    The real understanding come after knowing the FairTax and then looking at how it relieves issues resident in our income tax and most if not all of the modified income tax plans regardless if they are a form of Flat Tax including 9-9-9 which has created issues worse that the Flat Tax proposals other than HR-1040.

    • DWW bio

      i think that your completely right but wrong in many way pros and cons come in many shapes and size some can royally mess us up and others not as much….

  • http://www.facebook.com/marylee.belleville MaryLee Belleville

    I just started researching the “FairTax” when a bunch of Gary Johnson supporters started hitting up us Buddy Roemer supporters on FB. Buddy has unfortunately dropped his bid for the Presidency, but his tax reform plan has real merit from the perspective of both simplicity and fairness. Basically, the first $50,000 is exempt from all Federal income tax. After that all income is taxed at 17%. This applies to both individuals and corporations, both income from wages, profits and capital gains. All exemption’s go way. This is the simplest and fairest plan I have heard of.

    The “Fair Tax” is anything but. It shifts 100% of the tax burden to the people. Corporations pay zero. Of course now that the SCOTUS has declared that corporations are people, maybe that is up for debate.

    This is just classic trickle down nonsense. We are supposed to believe that because corporations would pay zero that they would pass those saving on to the consumer. If you believe that, I have a bridge for sale. Also it seems that there is huge opportunity for business to fudge the books. On top of that, it isn’t referenced in the article, but I read that the government could pay businesses a 3% fee for collecting and submitting the taxes. Can anyone confirm?

    • DWW bio

      sorry but i cant confirm your results

    • sonoranrant

      As you may have read in the article, corporations don’t pay ANY income taxes. They just pass the tax burden on to consumers in the form of higher prices. Stop trying to get corporations to pay their “fair share” When they raise prices it affects those least able to afford the increase.

    • punatic

      you ARE correct about corporations being the ‘friends’ of people……you’ll never see any price deductions…..and you’ll NEVER see any of those off-shored jobs come back either! This is just corporate garbage sold to the tea party dopes who fall for this travesty!

      • Robert Russ

        Yeah, because corporations and “the 1%” dont manipulate the current system. at all. Just one question, punatic: Have you read the bill? Oh, and I challenge you to use your facebook to login. I find people on these here interwebs are much more civil when the conversation is tied to them, not behind a screen name.

    • showard351

      One problem I have with other ‘Flat Tax’ ideas is that the main problems still exist. The IRS still exists and the government stills knows where I work and how much money I make. They don’t need to know that.

      • Tracy A. Goode

        The Fair Tax is NOT a “Flat Tax” and eliminates the IRS. The Government has no need to know how much you make, even for Soc. Security purposes–you actually would pay NO Soc. Security taxes.

        From the Fair Tax website: “Plus, seniors, like everyone else, receive a monthly prebate, in advance of purchases, for taxes paid on the cost of necessities which more than pays for all of the taxes they would pay if they received the average Social Security benefit amount and spent it all. If seniors choose to work, they are freed from regressive payroll taxes, the federal income tax on wages, and the compliance burdens associated with each. They pay no more hidden taxes on goods or services, and used goods are tax free. There is no income tax on their Social Security benefits.”

        Add to that that the Fair Tax actually brings in MORE money than the current system, as shown in studies, the Government can actually PAY Soc. Security to everyone without knowing how much you earned–everyone would just receive the same amount, and you could actually save MORE than they would pay you under the current system on your own.

        • showard351

          Read my post again. I am for the Fair Tax!

    • Colin Valenta

      Corporation already pay $0 in taxes. The consumer always pays the tax no matter what system you use.

    • Tracy A. Goode

      We already PAY all the taxes–When you consider that a box of twinkies has payroll taxes on the person who harvests the seeds that grows the wheat, the person that plants the wheat that then has to be harvested (more payroll taxes) to be taken to the mill by a trucker (MORE payroll taxes) where it is ground into flour (MORE payroll taxes) then shipped to the bakery (MORE payroll taxes) where it is made into a cake (MORE payroll taxes), filled with cream (and THOSE payroll taxes follow the same path) and wrapped in plastic (MORE payroll taxes), packaged in a box (MORE payroll taxes), shipped to the store (MORE payroll taxes) and all of those taxes are wrapped up in that $3 a box price–the price excluding taxes (and
      compliance costs- a “whole ‘nother ballgame” that will ALSO disappear),
      the price is probably only around $1 a box for the Twinkies themselves. As people gain THAT money back in their paychecks, and have more money to spend, there will be more opportunity for competition, driving prices down. At the same time, those competitive companies will need workers, and as the worker pool shrinks, wages will increase. As more people have more money, they will want more goods. More jobs will be necessary to make those goods, wages will rise. And so on and so on. Because used items are not taxed, the taxes having been paid on them, businesses will have more incentive to LOWER prices in order to keep new goods being purchased–leading to more money in people’s pockets. The prebate untaxes your everyday needs, and lowers your overall tax rate, until you spend more–but it’s YOUR choice to spend more–or SAVE more.

      Look, it already works. While this is a consumption tax, not a sales tax, Texas has one of the top 20 economies in the WORLD. It GREW during the Recession and RECOVERED faster than the rest of the country. Texas HAS NO INCOME TAX. It operates on a Sales Tax.

      • Henry Salo

        Texas has no income tax, same as Florida and Alaska. Texas also has oil, industries, cattle and it is a tourist attraction. Same as Florida has Epcot, Universal Park, tourist attraction. Alaska used to have an income tax but it was repealed when oil was discovered. Alaska is just starting to become an tourist attraction. States like these can make up for the income tax because of other resources. But states that don’t have natural resources, not a tourist attraction or whatever. YOU CAN”T COMPARE TEXAS WITH OTHER COUNTRIES OR OTHER STATES. YOU know better than that. What is the matter with you? Comparing this state with another state or comparing this state with another country. Plus there are countries that do have incomes taxes and a VAT and they are doing very well economically. Countries like Germany and Finland. I’m of Finnish descent and I look at Finland’s economic situation with the world. China and Hong Kong are doing well. Hong Kong has a two tier income tax but no sales tax. China has a complex tax system which includes an income tax. Quit the comparing stuff. I heard of that stuff before.

  • Chase Barfield

    I see that many people are focusing on rent below. Here is the best explanation of the difference between rent under our current system and rent under The Fair Tax.

    “An example in the FairTax Research information compared the Income Tax structure with the FairTax structure using $500 in monthly rents. With a 15% income tax bracket, the renter would have to earn $647 in order to pay his income taxes and payroll taxes and have $500 left to pay his rent.

    Under the FairTax structure, the $500 rent plus the 23% sales tax amounts to $649, $2 more than the income tax in order to cover his rent. HOWEVER, in comes the pre-bate to the rescue! And that renter has only had to use $2 of his monthly pre-bate to pay his rent, leaving the remainder to pay the taxes on his medical bills, dental bills, groceries, etc.”

    And, as for the 23% tax and how it compares to income taxes, this comes straight from the Fair Tax:

    The income tax bracket most people fall into is 15 percent, and all wage earners pay 7.65 percent in payroll taxes. That’s 23 percent right there, without taking into account the 7.65 percent employer matching! On top of that, you have to add in the business taxes and associated compliance costs passed on to consumers in higher prices.

    Effective tax rates vs. stated tax rates
    Because the 23-percent FairTax rate of $0.23 on every dollar spent is not imposed on necessities, an individual spending $30,000 pays an effective tax rate of only 15.5 percent, not 23 percent. That same individual will pay 17.3 percent of his or her income to federal taxes under current law.

  • Jcperez2000

    We teach our children that READING is a key component to become successful. For instance, most of us would encourage our children to READ test questions twice before answering – right? Well the children who fail in school are those whose parents promote the concept “Answer test questions without reading.” All those who oppose the FairTax, unfortunately, are doing so WITHOUT READING the bill once, let alone twice. Reading can help many of those who oppose to “Oppose by intelligence and not Ignorance.”

    • punatic

      baloney!…..once is enough with this garbage policy…….it’s geared for the wealthy ONLY! how dumb are you people?

      • Tracy A. Goode

        Punatic…is your name Richard, by any chance?

        It is geared toward EVERYONE. Read it, study it, THEN think you know what you’re saying.

  • http://twitter.com/TXFairTaxer TXFairTaxer

    Wait! You are “dedicated to empowering people to take charge of their finances”. Yet you SLAM the one and only tax plan that will actually give people the freedom to take charge of their finances?? I don’t think you truly understand the FairTax the way you think you do. Here is some info I hope you will take in:

    The FairTax gives you your federal taxes back.

    The FairTax allows We the People to CHOOSE when WE want to pay taxes.

    The FairTax prevents our corrupt politicians from picking the products/services that YOU may or may not use.

    The FairTax eliminates the $430 Billion Dollar Annual Tax Gap.

    The FairTax abolishes the $1 Trillion Dollar Annual Drag on our Economy (aka, the IRS)

    The FairTax will return 10,000,000 Jobs to America within the 1st 24 months of being enacted.

    The FairTax will END CORPORATE WELFARE.

    The FairTax will completely UNTAX the poor.

    The FairTax will tax ALL legal US citizens EQUALLY.

    Did you overlook all that when you were so focused on how bad it would treat the CRIMINALS who come to this country, STEAL our jobs, take advantage of our businesses, and send the money they earn to other countries?

    • punatic

      typical tea party gibberish…..or should I say ‘garbage’!…..I mean ‘we the people’?…….sheesh!

      • Robert Russ

        Care to refute any points with logic and reason, or are you going to hide behind a fake computer name and hurl insults?

    • showard351

      Touche! Get the government out of your paycheck!

      • Henry Salo

        Correction: The government will be checking your paycheck even under the Fair Tax. All incomes and payrolls must be filed with the Social Security Administration which is Federal. That is when you retire and file for Social Security, they go by payroll and income records. Family sizes have to be reported in in order to get the prebates. You think of a better way?

        • Robert Williams ®

          But they are not using that information AGAINST you or for Tax Collection purposes.

        • Henry Salo

          Correction: For Tax Collection purposes, they will be looking for your receipts.

        • Tracy A. Goode

          Unless you pay by credit or debit card, your receipts say nothing about who you are.

  • JoKeR

    I’d like to mention three things which I have not seen adequately addressed in the comments I’ve read below.

    First, the Fair Tax proponents claim that the entire expense of the IRS would be eliminated since there would be no income tax. This may be true as far as the current IRS structure goes, but a new and still huge government operation will be needed to collect and monitor the Fair Tax collections. The proponents mention that tax receipts from businesses will be monitored and tax cheats punished but they don’t mention how this will be done. Clearly the responsibility for this will have to be shouldered by someone and monitoring all sales transactions in the USofA will definitely be a non-trivial endeavor.

    Another point is the Fair Tax application to home sales. As I’ve seen it described here this tax would only apply to new homes since it would not apply to sales of used items. Creating an artificial differential of 23% (or 30% as the inclusive/exclusive calculations show) would put a big damper on new home building which is a huge business in this country. This tax would definitely not create jobs in this industry.

    Finally, a more controversial point. The Fair Tax is designed to target undocumented immigrants, and according to what I read here also legal immigrants in this country on visas, with green cards, etc. Since these people would not be eligible for the Prebate they would not experience the offsetting effect of the Prebate and thus would have a higher percentage of their spending (100%) taxed instead of only the after-necessity spending with the essential food/rent spending being offset by the Prebate. This would affect many millions of people and these are already some of the most marginalized people in the country. A tax which falls disproportionately on the most vulnerable and least empowered people is unfair on the face of it.

    • http://www.facebook.com/gary.lund.961 Gary Lund

      So you wish to reward illegal activity? Why should I have to pay for illegals? What is fair about that? Perhaps if it is too expensive to come illegally they will work to come legally? Please feel free to give your money to them but don’t force me to do it.

      So what if folks with less money pay a “higher percentage” of their income to taxes? They still pay less real taxes than those who make more. Those who make more spend more and pay more. That is far more fair that 47% of the population paying little to nothing into government and leaving everyone else to pay for government and for them. Everyone should pay in and have “skin in the game.” If everyone pays in then perhaps everyone will be a little more careful on how it is spent. Right now there is a huge percentage of the population that does not pay in but net takes so they are motivated to take more and more. There is no motivation for wisdom, responsibility, or frugality. And to make matters worse we blame the most successful and call them bad for not carrying more of the load. This is divisive at the least and surely encourages evasion whereever possible.

      • NoNeedforNamecalling

        Absolutely 100% agree. This moron above you is blinded by his left-leaning views. “Undocumented immigrants”? They’re illegal.

      • Tracy A. Goode

        The poor actually DON’T pay a higher percentage of their income under the Fair Tax–they pay LESS, thanks to the Prebate that EVERY legal resident gets. And as prices come down–which they will–it will allow them to save some little of the money they DO have once everything is no longer triple taxed, allowing them to get OUT of poverty if they wish by careful saving and investing in their own futures.

        When you consider that a box of twinkies has payroll taxes on the person who harvests the seeds that grows the wheat, the person that plants the wheat that then has to be harvested (more payroll taxes) to be taken to the mill by a trucker (MORE payroll taxes) where it is ground into flour (MORE payroll taxes) then shipped to the bakery (MORE payroll taxes) where it is made into a cake (MORE payroll taxes), filled with cream (and THOSE payroll taxes follow the same path) and wrapped in plastic (MORE payroll taxes), packaged in a box (MORE payroll taxes), shipped to the store (MORE payroll taxes) and all of those taxes are wrapped up in that $3 a box price–the price excluding taxes (and compliance costs- a whole ‘nother ballgame that will ALSO disappear), the price is probably only around $1 a box for the Twinkies themselves. That’s a big savings on ANYONE, not just the Poor.

        As a side note–under the Fair Tax, there is less need for Class Warfare, when everyone has the ability to make the choices that lets them move up in class.

    • showard351

      The Fair Tax is implemented and managed by the states. They receive a percentage for this service. Have you read the bill?

      • Henry Salo

        Article I, Section 8, U.S. Constitution: The Congress Shall Have The Power to Lay and Collect Taxes. This is a Federal Tax and it should be collected by the Federal agency for the Federal government, not the States. States are considered sovereignty. Businesses collect the money and send it to a Federal agency. That’s what they do with the Federal gas tax. I don’t care what these clowns wrote in that plan. I saw the plan and their writing is wrong.

        • showard351

          With the Fair Tax, it won’t happen that way. The state collects, manages, and pays the federal government, and gets a fee/percentage for doing it.

          The federal government will still have the power to lay and collect taxes, they just wont be doing it in the case of the Fair Tax.

          You must be an IRS agent. Better start looking for a job.

          Abolish the IRS, support the Fair Tax.

        • Henry Salo

          I disagree. The Federal government should handle their own taxes and the states, their own taxes. That’s the way it should be. What you are stating is unconstitutional. As for me being an IRS agent , that is the DUMDEST conclusion I ever heard. I’m retired and I believe in the Constitution even though you don’t. As for abolishing the IRS? This so called Fair Tax will create 3 new Federal agencies in place of the IRS.

        • showard351

          It will be law! The Income Tax is an invasion of my privacy as a US citizen. The federal government has no business knowing where I work and how much money I make. They have no business knowing how many dependants I have and how much I pay on my home mortgage! They just use that information to divide us into groups and play us against each other.

          So you are a supporter of the currnet Income Tax? 60,000 pages of exceptions for campaign contributers? 49% of Americans don’t even pay it! How fair is that? Shouldn’t you pay your fair share? The Income Tax will die. It is just a metter of time.

        • Henry Salo

          Also forgot to say this. “You must be an IRS agent. Better start looking for a job”. That is another DUMB conclusion. AS you note, the so called Fair Tax IS NOT A LAW. Chances of it becoming law 1% to zero. Not very good odds. The Fair Tax sponsors are not even pushing it. I heard a Senator who was a sponsor, was interviewed. Last time it was before the House Ways & Means Committee was in July, 2011. Mike Huckabee was the spokesman for it. Huckabee was the WORST spokesman for the tax. His face was twitching every time he talked. I watched it when it was televised. So the IRS will be with us and stop this nonsense, “better start looking for a job”. IT’S NOT LAW.

        • Henry Salo

          You said the so called Fair Tax abolishes the IRS? The Federal government will still need a Federal agency to process and handle this type of tax. With the IRS gone, who is going to enforce this tax? The fairy godmother? They will need a Federal agency to process S.S. filings, Obamacare, process and handling the prebates and so on. Your conclusion that the IRS will be abolished is Total Nonsense. The IRS will still be there under another name. How do you know if the states are going to handle this? Your conclusion. The states have enough problems handling their own taxes. The Federal government should manage their own taxes and leave the states managing thir taxes.

    • Tracy A. Goode

      Legal RESIDENTS would be eligible for the Prebate. Those who are hear VISITING or are here ILLEGALLY would pay the full 23% on goods. Those here as “undocumented workers” are breaking the law; this would give them incentive for coming here LEGALLY. Add to that, as more jobs are created, and fewer Americans are available to fill them, it gives Government an incentive to go back to the dayworker programs that existed before the Great Depression made it necessary to close the borders so that white males would have jobs.

  • wjones4iv

    After reading the comments I am left wondering how much in actual dollars the prebate will be. Does anyone know how the prebate will be calculated?

    • http://www.facebook.com/liza.demmel Liza Demmel

      $214 + $76 per child

      http://www.facebook.com/photo.php?fbid=4116471663089

  • SWG

    I think you need to be very clear on how the FAIR tax performs at the retail level. Your example of an item being marked $100 but in actuality is a $77 dollar item with a taxed amount of $23 added is misleading. You are inviting people to believe that they will be paying $23 more for this item than they do at the present time. This is not the way the plan works. The item you will pay $100 for (should this plan ever pass) is already currently sold for $100…PLUS you pay sales tax on top of that giving the item a retail cost of $108.00 (if your state sales tax is let’s say 8%) to the consumer. Under the FAIR tax you will only pay $100, because there is a 23% tax already embedded into that item just in order to comply with our “current” tax codes. That 23% that is embedded into the item represents every bit of tax/tax compliance costs along the way that was paid out by everyone involved in the manufacturing process of said item. The difference under the FAIR tax is that you will now only pay the $100 (not the $108) and the RETAILER will send the government $23 of the embedded tax to the government. The beauty of this plan is three fold….#1) The consumer will actually pay less out of pocket …#2) It will generate MASSIVE amounts of tax dollars because, unlike income tax, there is no getting around paying it. Every time you make a purchase, the tax dollars embedded into that item go directly to the Federal Government. Which means, that even undocumented workers will be contributing their fair share. They don’t pay income taxes now, but using this method they will pay the same taxes as everyone else unless they never step foot into a store or make a purchase of any kind (highly unlikely) This also means that the government will be collecting taxes from anyone and everyone who is paid under the table or works/owns a black-market operation…..#3) You get to keep your entire paycheck without Uncle Sam breathing down your neck. The taxes you pay are taxes you CHOSE to pay based on what you chose to purchase. There is great value in this brilliant plan, and I for one, am a firm believer that it would catapult us out of our economic crisis, and quickly start paving the way for paying off our national debt, thus freeing us from the grips of borrowing money from countries that don’t like us. My understanding is, that there is also a provision made for those who are of low income, which refunds them, on a monthly basis, for any of the taxes that apply to staples and day to day living costs. There are two excellent books out called the “Fair Tax”, and “Fair Tax: The Truth: Answering the Critics”. Both books were written by Congressman John Linder and Neal Boortz. Before you judge, you need to be educated. This could change the entire face of our economy and make us an economic super power once again.

  • djc1309

    Very good article Holly. Finally someone has addressed both sides of the issue. I like a lot of the things that the FairTax will accomplish. But the simple truth is that the 23% inclusive (30% exclusive) tax will raise the price of everyday consumables by about 22% (exclusive). That means that a gallon of gas that currently costs $4.00 will cost the consumer $4.88. Other items that do not have various layers of distribution in them will increase by more. For example, if someone is currently paying $1,000.00 a month in rent, they will be paying $1,300.00/mo under the FairTax. FairTax supporters will try to tell you that prices will not increase because there are about 23% of embedded taxes that will be replaced by the FairTax. This is simply not true. A company producing a product will only be relieved of the 7.5% taxes they pay to match the employees SS/HI. This amounts to a measly 0.8% of the selling price of the product. Corporate income taxes amount to another 1.7% of the sales price. This nets the company a total savings of 2.5% of sales.
    You are correct Holly, that this bill creates the largest entitlement program in history. Every household will be entitled to a prebate check no matter what their income. Millionaires will be getting the same prebates that the poor get.
    Business’s are totally exempt from paying a consumption tax on items that they consume.
    You are also correct to point out the deception that the promoters of this bill practice. For example, the promoters of this bill are quick to point out that the bill will eliminate the IRS, but they keep it pretty well hidden that the bill creates TWO new IRS type agencies to replace the IRS with.
    After reading some of the posts here, I find it amusing that the FairTax supporters still do not know how to calculate a markup on a product. To calculate a markup on a product, you simply subtract the desired markup from 100, divide the difference by 100 and then divide the cost of the product by the quotient. For example, if you need a 35% Gross Profit margin and your cost is $50.00, you would divide 50 by .65 to get a selling price of $76.92. If you add in the 23% (inclusive) Fair Tax, you will divide your $76.92 selling price .77 and you get a new selling price of $99.90. Yes, your $50.00 initial cost will go down by a little bit because the maker of the product has about 2.5% reduction in cost by not having to match the employees SS/HI and by not having to pay income taxes.
    In the end, this bill will increase the tax burden on the low and moderate income class while giving the upper income class a substancial tax break. A simple way to look at it is to acknowledge that ALL taxes are ultimately paid by the consumer. The wealthy in this country simply do not consume the amount of product that the lower and moderate income people consume. Therefore, the lower and moderate income class will have to pay the bulk of this tax. Corporations do not pay taxes, they simply collect the taxes and forward them on to the government.

    • showard351

      This is incorrect. The Fair Tax is not added on to the sales price like a sales tax. The Fair Tax is included in the price by the retailer (inclusive). You will never see the Fair Tax in the price of your goods and services, just like you
      don’t see the income tax that the producer pays now. It is already included in the price. This is why the Fair Tax is more properly called a consumption tax, not a sales tax. Sales taxes are quoted exclusively. Have you read the bill? I have. HR25.

  • LandOwner

    Where does this stand on property tax? I know a lot of people having to sell their land they own because they can’t pay the federal property tax.

    • punatic

      what ‘federal property tax’?…..are you confusing this with inheritance tax?……there is NO federal property tax.

  • Grailxox

    Why can’t we just have a flat rate income tax? 10 percent from everyone. Get rid of income tax and just tax everything with a flat rate! FLAT RATE!! Take ten percent from the lower, middle and upper class. Stupid adults.

    • showard351

      Because the government will still know where you work and how much money you make. They just use this information to put us into groups and play us against each other.

    • Tracy A. Goode

      Because a flat tax is still a tax on income, still discourages productivity, is still manipulable by Congress in favor of their friends and never stays flat. The current mess STARTED as a flat tax, has been reflattened time and again, and never stays flat. The Fair Tax is a consumption tax, and about the most it will do, other than raise more revenue as it captures the tax dollars not paid by illegal activities, illegal residents and under the table workers, is change some consumption habits as people make wiser choices and save more money. Even that will be mitigated by the fact that people will have MORE money to spend as businesses come back from overseas, create jobs, compete for workers and wages rise.

  • http://www.facebook.com/profile.php?id=100002198280854 Robert Russ

    M(r)s. Mangan,
    I will have to respectfully disagree with your assessment of the use inclusive vs. exlusive tax rates being an intentional ruse. This is from the article you linked in response to James C. from the Tax Policy Center:

    “Sales tax rates are typically quoted in tax-exclusive terms, but income tax rates are typically quoted as tax-inclusive rates. For example, a household that earns $130 and pays $30 in income taxes would normally think of itself as facing roughly a 23 percent (30/130) income tax rate.”

    You have to compare apples to apples. Stating the fair tax in tax-exclusive terms and comparing it to the current income tax (which is stated in tax-inclusive terms) wouldnt be, well, fair.

    For example, an individual who earns $ 100,000/yr pays about 25% in Federal income tax, or $25,000. This is the tax inclusive rate.

    However, if calculated as the tax-exclusive rate, it jumps to 33%.

    Another way to state is:
    I pay for an item costing $100. $23 dollars goes to the FairTax.
    I earn a paycheck at $100. $25 dollars goes to the IRS.

    I am not sure how old this article is, so it may fall on deaf ears. I would appreciate a response, as this is one of the most commonly misunderstood aspect of the Fair Tax.

    • showard351

      The Fair Tax is not added on to the sales price like a sales tax. The Fair Tax is included in the price by the retailer. You will never see the Fair Tax in the price of your goods and services, just like you don’t see the income tax that the producer pays. It is already included in the price. This is why the Fair Tax is more properly called a consumption tax. Have you read the bill? I have. HR25.

      • Robert Russ

        I think we are saying the same thing. I never said it was a sales tax (I did however include quotes from the article)

  • Viethalweapon

    The issue of confusion is it’s not a 23% tax on the value of the item or service your are purchasing, set by the business selling said items or services; it is a 23% tax on the total amount of money spent. Therefore, in order for a business to make a certain dollar amount of revenue, they would need to charge approximately 30% above the current today sticker price to make the same amount of money. This could potentially balance itself out if what is outlined in number 4 of the above statements listed under pros happens and businesses could indeed lower the rates of their goods and services to operate at the same level of success.

    • showard351

      The Fair Tax is not a sales tax. Sales taxes are usually quoted exclusively. The Fair Tax is quoted inclusively. It should be called a consumption tax.

    • punatic

      they’ve already duped you too……

    • schlice

      That’s absolutely untrue. The business revenue doesn’t have anything to do with the tax. The tax is added to what the business charges for the product.

      The amount that the business currently charges for the product will drop because the business previously had to roll corporate taxes into the cost of their product, which increased the price of their product by 30%. Remove that 30% and they still make a profit, because they still charge the cost of the item plus profit. The 23% consumption tax gets added back in, and the price of the product remains pretty stable.

      Market forces will ensure that corporations don’t leave additional hidden profit in their prices. Margins are already paper thin on products, playing that game will only lose them business.

  • santara34

    Atlas Shrugged

  • Jerry

    Want progressive fair tax? Have it apply to ALL sales – meaning purchases of stocks, bonds, all financial instruments, real estate, property and so on. This would make it fair and progressive. I bet the rate would drop to about 5%. No more stock market, or any other market, speculation.

    • Colin Valenta

      Your theory results in double taxation, which isn’t good for anyone.

    • John Wiese

      Bad idea taxing investment lowers the amount of money available for investment, which means less money for creating jobs.
      I have heard of an interesting tax system called a transaction tax that would tax every exchange of money 0.5%, so you lose .5% of your paycheck, .5% on everything you buy, and .5% on every stock transaction. Not a bad deal but a bit difficult to implement since the stock market is international.

  • Scott Hedrick

    “I have a five-person family: two adults and three children. Our effective tax rate was 8.91% last year”

    I’d just like to point out that including FICA tax you paid either (13.3 + 8.91)% or (15.3 + 8.91)% depending on when this was written. Thus under the consumption tax with the prebate you would not have paid as much in taxes. Also assuming you’ve likely saved / invested some of your income, even without the prebate you would have spent less on taxes.

    • showard351

      Also, the price of goods and services would not likely go up much. The Fair Tax removes all income taxes, even from companies. So the companies that produce the goods and services will no longer pay income tax. So that will come out of the price, and will eventually be replaced by the Fair Tax consumption tax.

      • punatic

        baloney, the greed of corporations remains as well as the filthy corporate executives…..they aren’t nice people and never have been…..they’ll make as much as they can wrangle out of you while they find a way to bypass their own purchase taxes…..who are you kidding? they’ll somehow figure out a way to buy milk as a corporate to corporate item/widget and pay “0″ !

        • showard351

          Competition, market forces will keep the prices low.

        • ptdeep51

          Maybe punatic would rather live in South America or Central America. You would then have gotten away from all those greedy rich people who pump money into the economy and give you a job

        • schlice

          You are quite deluded. Corporations are legal fictions which do not pay taxes anyway. Anyone who believes you can tax a corporation to benefit a poor worker is deluded at best. Any tax levied against a corporation gets passed directly into the price of the product they produce, or comes out of the wages paid to its workers. When we remove the payroll tax and the corporate tax, the workers benefit twice. They get all their money, and the corporate taxes that were previously embedded in the price of the product disappear. They get replaced by the consumption tax, so net prices shouldn’t change much.

        • John Wiese

          Yes they can get tax free milk IF they’re making CHEESE. They will be forced to lower prices to match lower production costs because their goal is build a product at the lowest price possible and the sell more than their competition so if they don’t lower their prices to reflect the lower production costs their competition will and then they’ll lose market share and earn less. Remember they’re greedy not dumb.

  • Chris J. Mullins

    Can someone help me please i need some cons on this topic ASAP

    • John Wiese

      Sorry there aren’t many, the biggest one that is actually valid but still irrelevant is double taxation of after tax investments made before the FT is implemented. You paid the income tax on the money before you invested it and you’ll be taxed again when you spend it, HOWEVER, you would have spent the same amount on higher prices so it really doesn’t make a difference on buying power.
      BTW, why are you against it?

  • Djnh

    FUCK

  • Mary

    On the whole, a good article. One advantage that you did not mention is that the FairTax is good for the environment. There are no taxes on USED good, so buying used goods becomes significantly cheaper than new goods, thereby encouraging people to reuse stuff rather than toss it in the landfill.

    I would disagree on a few points in the article. The rich WILL pay higher taxes if the spend more money than the middle class, regardless whether they spend their entire paycheck each month or not. How many rich people live middle class lives?

    Tax evasion will be harder, not easier. Right now drug dealers, thieves, etc. pretty much evade income taxes completely but still pay sales tax. I go to the store to buy a book, I have the sales tax, but if I had an all cash business, I would only pay taxes on what I said I made.

    It also wouldn’t be a 30% increase, like you said because right now we pay a large amount for imbedded taxes that would go away if FairTax pasted. The amount of imbedded taxes varies a lot (our current system is so convoluted there is no straight answer for that) but I heard, on average, its 18%. Plus there is the Prebate, which reduces it even more.

    • showard351

      The Fair Tax is not a sales tax. Sales taxes are quoted exclusively
      (added to the sales price). The Fair Tax is inclusive. It is included in
      the price of the good or service by the retailer. It should be referred
      to as a consumption tax, not a sales tax.

      • bob60506

        Call it whatever you want; to the consumer, it is still the equivalent of a 30% sales tax. The bottom line is that we’d pay 30% over what the retailer keeps for himself. A LOT of people (about half of us) don’t pay ANY federal income taxes right now, due to deductions and credits. This would stress people just above the poverty level more than anyone else.

        • showard351

          With the FairTax, all corporate and personal income taxes go away. It is estimated that everything you buy now has an embedded 21% cost because of the corporate income tax. So replace that 21% with the 22% of the Fair Tax, and basically prices to the consumer will not rise. The 30% is arrived at when erroneously quoting 22% exclusively. There is no 30%.

          Is it fair that half of you don’t pay any income taxes? No. You need to pay your fair share!

        • John Wiese

          Technically that won’t change, if you’re living below the poverty level for your family the prebate will give you a negative tax rate just like the EITC doen now. The difference is you get to keep every dollar you earn without the possibility of being penalized for working too much and losing money because of getting taxed at a higher rate. The biggest difference is you will see the tax amount on every receipt so everyone will be able to see how expensive government is ON A DAILY BASIS, it might change our perception of government goodies and eventually we might actually stop asking for them or demanding less instead of more.

        • John Wiese

          No, the prices stay the same, our income goes up because no payroll taxes are deducted, and the prebate would 0 out the taxes on every dollar spent up to the poverty level of your family. I’m poor and I’d love to see the FairTax implemented, the benefits far outweigh the downside.
          The reason they did it inclusively was because so it could be easily compared to the income tax, with the income tax you earn $100 and on average $23 is deducted from your check(I’ve had up to 30% coming out of my paycheck when I had a decent job), with the FT it just collected at the register instead of from your paycheck so you get to choose how much tax you pay by how you choose to spend your money.

  • http://www.facebook.com/janice.p.boston Janice Parsons Boston

    So new homes and cars are taxed, but used homes and cars are not?

    • Tracy A. Goode

      No, Janice, because the taxes will already have been paid on them when they are new. The exception would be an item bought by a business for its use that was later sold to a private person, for example, a company car. The business pays no taxes on it, but the private person would, albeit at the value of the car when sold to that person.

      This allows people to make wiser buying choices, and save money–and invest in their own futures.

      • JPfrmME

        Tracy, I have read the Fair Tax Book, the bills in the Congress currently and my understanding is that all new items will be subject to the tax, regardless of it being used by a business or not. I would like to know where the source of that tax exception you mentioned is documented, if you have it, please.

      • John Wiese

        I think that the end user is taxed so if a company buy’s a car, office supplies or a plane ticket they would pay the tax, but when they buy materials or equipment to make something else they wouldn’t be taxed. I think the only exemption are things used in production not everything, because a CEO’s would be able to buy everything with a corporate credit card tax free.

  • Joanie

    No one, that I have read, mentions how the economy would improve if people would buy “used” everything! For instance a car. Why would I go out and buy a new car for $25,000 and pay 30% tax as apposed to buying a used car for $25,000 and paying no tax? This is applied to all new verses used goods, for instance houses, clothes, appliances, etc. Just exactly how is this going to increase jobs??

    • Colin Valenta

      When TRILLIONS of dollars come back from overseas that money has to go somewhere. The rich and businesses will invest it here since taxes are low. Investments = jobs, and lots of them.

    • Tracy A. Goode

      Joanie, as businesses are untaxed, our country becomes the better place to be. As businesses come here, they will bring jobs. As more jobs come, the worker pool will become more competitive as fewer workers are without jobs. As prices drop, due to no more triple taxation, more people will want to buy more goods. As more people want to buy more goods, more jobs making those goods will be created. As more jobs are created, and more workers are needed, wages will rise. As wages rise, more people will have more money to buy more goods, which will repeat the cycle.

      You ask what is to stop someone from buying a $25,000 car used and paying no taxes–Nothing. But, pretty soon, there would BE no used cars available. And there will always be someone buying new instead–because there are those who always want the newest and best. That said, yes, 30% of the new item would be taxes, effective 23%. But, you have more paycheck available to you, and with the prebate, you actually don’t SPEND 23% unless you are spending $4,000,000 a year. Most people will spend no more than about the 18% they are already paying–and those in the underground economies, the illegal trades and being paid under the table will actually end up paying the same, instead of the ZERO they pay now.

      Studies have shown that the Fair Tax, even with the Prebate, brings in MORE money than the income tax. And, a final note–TEXAS has one of the top 20 economies in the world. No income tax, all sales tax. Its economy GREW during the recession, and recovered faster than anywhere else.

      The Fed can do the same.

    • JPfrmME

      There are only so many ‘used’ cars available and every year many of them go to the junk pile. We simply wouldn’t have enough used cars to allow everyone to buy only used cars. Remember that when the Fair Tax is implemented, the cost of producing a car will drop due to the elimination of all the enbedded income tax costs in all the parts that make up the automobile. The over all price including the new Fair Tax should be about the same as before the Fair Tax. So you would have to make the same decision that you have to make now, should you buy a lower priced used car or would pay a somewhat higher price and buy a new car?

    • John Wiese

      The same reason you buy a car today, there will be no difference UNLESS it’s an import that is built outside of the US which would cost more. The production cost will decrease because businesses will no longer pay taxes on production and the decreased production costs due to not having to pay payroll and income taxes is about the same as the rate of the FairTax so it will be a wash, if you could afford to buy a new car today it will be no different when the FairTax is implemented because the price will be the same, the taxes are just collected after production instead of added to production costs.

    • Nathan

      My understanding is the used car will be taxed once the fairtax is in place.

    • Pb

      Joanie. The Fair Tax would only tax the buyer of a new car once. From what I understand if you buy a used vehicle that was once new the tax has already been covered on that purchase by the original buyer. So after ten years they sell that car much cheaper, the seller would cover the taxes not the buyer…is this correct?

  • punatic

    Stop this madness in it’s tracks, NOW! Don’t fall for this BS…..it’s created for the ‘tax break’ loving rich! They always want more but don’t like to pay like the average joe does!

    • zazz

      Thanks Marxist drone. The Rich as you put them, currently avoid paying Taxes. And let’s not forget connected corporations like GE…$13 Billion in profits – $0 Taxes. With a Fair Tax they’d be paying tax on the parts and supplies of every generator, light bulb and cable they installed. By the way, has a poor person ever hired you for a job?

      • marshwill

        Corporate taxes on purchases of raw goods, parts, etc. are free from the Fair Tax. Corporations do not “pay” taxes…. they simply “collect” the taxes from us–their customers–in the form of higher prices, from their emplolyees in the form of lower wages, or from their stockholders in the form of lower dividend earnings.

  • showard351

    The Fair Tax is not added on to the sales price like a sales tax. The
    Fair Tax is included in the price by the retailer. You will never see
    the Fair Tax in the price of your goods and services, just like you
    don’t see the income tax that the producer pays now. It is already
    included in the price. This is why the Fair Tax is more properly called a
    consumption tax, not a sales tax. Have you read the bill? I have. HR25.

  • Dora

    Hi, why would there have to be a prebate check? Get rid of it! Then everyone should be pretty happy, the rich or wealthy wont need a prebate check.. neither would the poor… they would be receiving a larger paycheck it no taxes are taking out . A prebate check could be offered to everyone if NEEDED but it should NOT be automatic.

    • Tracy A. Goode

      Dora, the Prebate allows those things that you use on a daily basis, like food and utilities to be tax-free. It is also not automatic; you simply report how many people are living in your household. The amount is the same per person–no more “this much if you’re married filing jointly, this much if you’re married filing seperately, this much if you’re the head of a household, this much if you’re single”–which do not necessarily amount to the same amount. It is available to all LEGAL residents to take advantage of, and effectively lessens your overall tax burden–lowering that 23% so that you pay in reality no more than you do today–but you get to keep your whole paycheck. The more you spend, the less the Prebate affects your taxes, but it is FAIR to EVERY LEGAL RESIDENT–regardless of where they are from, unlike the author’s belief. She needs to reread what she is writing about.

      • Henry Salo

        There is a problem with the so called prebate. Every state has a different cost of living. Some states are higher than other. The so called prebate is the same. Look at the rents in New York and California and compared them with rents in the South and some rural states. . Also note, the “p” on prebate does not have to be capitalized. It is not a name or title.

        • John Wiese

          The prebate is based on the average cost of living and it’s no different than it is now, if you choose to live in a high cost of living area there is no special tax deduction to make up the difference higher wages do, so why should it be any different with the FairTax. If you could afford to live in a high rent area now that will not change when the FairTax in implemented.

  • zazz

    I’m tired
    of hearing about the rich not paying enough. Every tax plan is in fact
    “progressive”. The Rich will always pay more, because they
    purchase more expensive things. The current system is a joke. Setting aside the
    outlandish corruption at the IRS, politicians use today’s tax code to pay off
    donors. To prove this, simply look through congressional records and track the
    riders submitted to bills by individual representatives over their careers in
    office. Then, examine each of their donors and you’ll find incontrovertible
    evidence that the tax breaks and political support are directly connected. For
    instance, many of todays obscure tax breaks didn’t come about by chance. Ex)
    Tax break for buying a racehorse, the myriad of tax breaks for proven to fail,
    nonsense “green” energy companies – which the taxpayers are already
    funding through grants, etc.

  • Noel Swain, CFP®

    Molly Mangan surely has an agenda, or she hasn’t gotten very deeply into the substance of The Fair Tax. You see her bias before she even gets into the disadvantages of The Fair Tax when she tells us “it falls apart” at the very beginning of the Disadvantages part of the article. Of the seven disadvantages she mentioned, six of them she has simply misconstrued or the argument itself is specious. For example, in Number 5 she says that The Fair Tax would impose a bigger tax burden on high income tax state citizens by not making their state income tax deductible against their federal income tax. Point one – why would she need a deduction against a tax that is no more? The Fair Tax eliminates the Federal income tax. Point two – Why should those in low state income tax states have to subsidize those in high state income tax states by not getting as big of a deduction against their federal tax? I believe it is fairer to make the states stand on their own. If they did, maybe their citizens would start sending different representatives to their state legislatures. The only point Molly made that has any merit is point #2. I, too, have a concern about the rise of barter clubs that could be used to skirt The Fair Tax, so I do believe legislation would need to be crafted to eliminate that as an issue. But overall, when compared to the mishmash 75,000 pages of the current Federal tax code, the 125 page Fair Tax is head and shoulders above it. To help the people who haven’t given this much thought get it properly alligned in their minds, answer this question. If our country had no current system and was in the process of designing a federal tax system, and the voters had to choose between what we have on the books right now, with all 75,000 pages of loopholes and contradictory language that taxed production, and a 125 page simple tax system that taxed consumption, what do you think the people would choose? What would Molly choose? What would you choose?

    • Erik

      Noel,
      It said that the federal taxes would go away, but that a person could NOT deduct their STATE tax anymore. NOT that they would have to pay federal AND state taxes. (Though federal income tax would go away, state income tax would remain,
      and of course it would no longer be deductible against federal taxes.
      The effect would be a great burden on residents of high income tax
      states like California. Moreover, unless you live in a sales tax free
      state, like Oregon or New Hampshire, you could pay your state’s sales tax on top of the Fair Tax and on top of your state’s income tax. For a family living in Los Angeles making $100,000, this would be well over 40%!)
      That means they would NO LONGER BE ABLE TO DEDUCT STATE TAX, AND THEREFORE HAVE TO PAY ALL OF THE STATE TAX…

      • schlice

        With the Federal government repealing income tax, you can be sure that states will quickly follow suit and eliminate their own income tax. I predict that states wouldn’t last one or two election cycles before “State Tax Repeal” candidates flood their legislatures.

        And when businesses and people quickly migrate away from states who stubbornly cling to the past and hold on to their poor state income tax systems, states will be clamoring for a chance to repeal their income taxes (holding special mid-term ballot measures, special state constitutional conventions, etc).

      • JPfrmME

        Please explain why state income taxes would remain. Most states simply base their income tax forms on the federal tax form as filed. It that is eliminated, the states are going to have to pass lots of tax code to duplicate what the Federal government is doing now. Do you really think that would happen. You think the citizens of those states having had their federal tax burdensome system eliminated from their lives would allow their state legislators to put it back in? It would be so much easier for the state legislators to simply have an add on State Fair Tax. Wouldn’t it?

      • marshwill

        Please explain what would be the value of a deduction (state income tax) from a tax that is no longer being collected (Federal Income Tax). I can’t see any lost value. Same for a home mortgage deduction!! The FairTax essentially “deducts” 100% of your earnings from any tax liability. I like that much more than I like my home mortgage deduction.

  • FairTax Skeptic

    This was probably the most balanced article I’ve ever seen on the FairTax, so kudos for the author. However, she missed a number of problems inherent in the FairTax.

    1. The Rate. Virtually every independent study of the FairTax — including the Joint Committee on Taxation, the Brooking Institution, Rice University, and President Bush’s Tax Reform Commission — have concluded that the actual tax rate under the FairTax plan would need to be far higher than 30% in order to be revenue neutral. Most studies have concluded that the rate would probably be somewhere between 50% and 60%.

    2. State and Local Sales Taxes. Since the FairTax is a national sales tax, you would need to add state and local sales taxes on top of the FairTax rate. Moreover, since the FairTax imposes a huge new tax burden on state and local governments (because all government spending would now be taxed under the FairTax), the sales tax rates imposed by state and local government would necessarily increase. The bottom like is that state and local sales taxes would end up being somewhere between 10% and 20%, which would be on top of the FairTax rate.

    3. Sales of new goods would drop dramatically.. As the author has already noted, there would be a decrease in over-all spending. (Does anyone remember the 10% “luxury tax” imposed on the sale of yachts under the first Bush administration? The sale of new yachts dropped dramatically. Imagine what would happen with a sales tax of over 50%.) People would simply stop buying new cars and new homes. (Can you imagine paying over $100,000 in sales taxes for the privilege of buying a new home?) Instead, people would buy used cars and existing homes (both of which would be tax free) or just keep their current cars and houses..

    4. People would by more things abroad to avoid the FairTax. Purchases in other countries would not be subject to the FairTax. So you would see an increase in (a) foreign vacation travel, (b) buying luxury goods, such as diamond rings, Rolex watches, etc. while on foreign trips, (c) medical services purchased abroad, (d) more retirees going to live in Mexico and Central America. The bottom line is that much more money would be spent in other countries, and much less money spent in the US.

    5. Since business expenses would not be taxed, more personal spending would be shifted to “business” expenses. Although that happens today, under the FairTax system required record-keeping is supposed to dramatically curtailed if not eliminated, and profit becomes irrelevant for tax purposes, so it would be much more difficult to root out fraud and abuse.

    6. Under our current system, must income is subject to dual-reporting. That is, our employers, banks and brokerage firms must report our income to the government, which then checks it against the incomes we claim on our tax returns. Cheating under the dual reporting system is minimal. Most tax cheating occurs where there is not dual reporting. Under the FairTax, there is no dual reporting, so tax cheating will be that much more difficult to detect.

    7. As the author already pointed out, since the tax burden on the rich will be dramatically lowered under the FairTax system (since they tend to spend far less of their incomes than do the poor and the middle class), the result under the FairTax system would be to shift the tax burden to the middle class.

    8. For people who couldn’t avoid the FairTax by the methods described above, the result will be catastrophic. For example, all medical services would be taxed under the FairTax. Imagine being diagnosed with cancer and having to pay $100,000 in taxes on top of a $200,000 medical bill. Imagine older people being kicked out of nursing homes because they couldn’t come up with the FairTax on their stay.. How about people being unable to pay the FairTax on top of their heating bills in the winter, or on their health insurance, car insurance, rent payments, food, medicine, gasoline, etc.,etc. It would truly be a nightmare scenario.

    All of these problems are self-evident for anyone who actually spends a few minutes to look at the FairTax objectively, Unfortunately, far too many people have drunken the Kool-Aid and believe the hype about the FairTax, and corrupt politicians have jumped on the bandwagon as a way of pretending they are far tax reform when they know it’s a sham.

    • JPfrmME

      Unfortunately many of your arguments are based on questionable information. For example “Sales of new goods would drop dramatically” you quote the old 10% tax on luxury yachts as an example. The fallacy of this argument is that the 10% luxury tax resulted in a real and immediate increase of the cost of buying a new yacht. If the Fair Tax is implemented, the actual cost to manufacture a yacht will go down because the Fair Tax eliminates all income tax, corporate, personal or otherwise. We all know who pays the corporate in come tax; the consumer does because corporations, being in business to make a profit, add all their expenses, taxes included, to the cost of producing their product and pass it along to the buyer. Likewise the same applies to homes. So adding the 30% sales tax to these lowered prices will not produce the sticker shock that the 10% luxury tax produced.

  • Todd Hamilton

    I agree that this is a well written article. However, there are a few points I think were missed.

    1. States with income taxes base their tax off Federal Income Tax returns. They would necessarily need to change to a sales vs. (income tax) system.

    2. The current income tax system is regressive in ways even the author fails to acknowledge. Corporations pay taxes, but they add these costs to the price of their products. Products “Made in American” have (on average) a 23% hidden income tax that imports don’t have. The Fair Tax is designed to have a “zero” net impact on prices of American made products.

    3. The Income tax encourages jobs and capital to be kept off-shore. An income tax may have worked 100 years ago when we were an isolationist country, but not in the age of Globalization. The Fair Tax would eliminate this incentive. Companies would invest in American again instead of building out capacity overseas.

    4. The Fair Tax expands the tax base and will negatively affect some people…that much is true. Tax cheats, illegal aliens, criminals, etc. will all have a larger tax bill. Current tax payers will be able to control their tax expenses with their spending. Anyone that works extra hours or an extra job will be able to keep all they make. Taxing labor is a really bad idea.

    5. The biggest objection to the Fair Tax is the perception that it will be a windfall for the very rich. The fact is that all economic groups (poor, middle-class, and rich) all benefit from the Fair Tax. Most folks assume that the rich spend the same amount day-to-day as the poor or middle-class and that the difference is their windfall. Nothing could be further from the truth. The Rich spend considerably more than you or I and will be taxed accordingly. The percentage would be based on spending and different for everyone.

    6. Stimulus spending is far more efficient under the Fair Tax. Currently, when the Government tries to stimulate the economy, they pump liquidity into the system which is either absorbed into the stock market…making the Rich even richer or it’s spent on cheap imports and goes overseas. A stimulus under the Fair Tax (tax holiday) could be targeted towards specific sectors of the economy to produce the desired result here in this country.

    7. Transparency! Every citizen will understand the impact of increased government spending. Politicians wouldn’t be able to hide taxes. They wouldn’t be able to simply say, “Vote for me and I’ll tax those folks over there and give it to you.”.

    I can go on, but I think you get the point…the Fair Tax isn’t always “fairly portrayed”.

  • wolfdoctor

    “The fact that the rich spend less of their income is a wash, when compared to all the various deductions that they get and the legal tax shelters that they use, under the current system. ”
    Under the Fair Tax the VERY wealthy will be taxed at a MUCH LOWER rate. Calling it a wash simply means that either (1) you are a shill for the rich or (2) you haven’t done the math.

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