The Fair Tax
With the Presidential campaign underway politicians have been jawing a lot about a “Fair Tax” as a way to simplify taxes and make them fairer. Two versions were considered. First was a "Flat Tax" scheme, where everybody pays the same tax rate with some basic deductible allowed. Before you draw your own conclusions whether you are for or against it I strongly urge you to read to the end of this paper.
The more popular version of a "Fair Tax" is a consumption tax, much like a sales tax, which will add between 23% to the retail price of most goods and replace the most other forms of federal tax. The 109th congress passed H.R. 25 with the intent of enacting this form.
H.R. 25 will eliminate the-
- Federal income tax
- Federal capital gains tax
- Federal payroll taxes
- Federal inheritance taxes
And replace them with the 23% sales tax.
It will not eliminate the state income and sales taxes.
The Stated Intent
Let’s first look at what congress says is the goal of the “Fair Tax” doctrine. Quoted directly from the bill as follows-
“To promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.”
Further the Bill States
“FINDINGS RELATING TO NATIONAL SALES
TAX.—Congress finds further that a broad-based national sales tax on goods and services purchased for final consumption—
- is similar in many respects to the sales and use taxes in place in 45 of the 50 States;
- will promote savings and investment;
- will promote fairness;
- will promote economic growth;
- will raise the standard of living;
- will increase investment;
- will enhance productivity and international competitiveness;
- will reduce administrative burdens on the American taxpayer;
- will improve upward social mobility; and will respect the privacy interests and civil rights of taxpayers.”
Clearly the goals of H.R. 25 are laudable and our legislators should be congratulated for this imaginative solution to the complex Federal tax code. Right!
Wrong. This, like most legislation, has some “unintended consequences” which affect all of us.
How is the tax paid
Basically all goods and services are taxed at 23% rate “at the retail level”. The intent is that only the end user pays the tax. This means that manufacturers will not be taxed on materials that go into the products they build, and that retailers will not be taxed on products they buy for resale. The tax will only be collected when the “final user” buys the product or service. Sounds good! However, they are not taxed on this stuff now. In fact in may states no sales taxes are applied to services.
What the bill does not make clear, but true never-the-less, is that manufacturers, wholesalers, retailers and service companies will pay the 23% tax when they buy the assets employed in their trade or business. Whether it’s a building, delivery truck, oil-drilling rig, production machine or copy paper the business will have to pay.
Guess what the business does when their cost go up because of this tax! They increase prices! Remember if you have to pay a 10% higher price for a product there will be 10% more tax due.
Not only are businesses affected this way. The same rules apply to government. Under the bill state and federal governments have to pay the same tax when they are the end-user. So it becomes very likely that state and local taxes will have to be raised to generate the revenues local governments need to pay these federal taxes.
School districts are not exempt. Last year we passed a one billion dollars school building bond. With this tax the schools will cost the taxpayers 23% more than planned. Another excuse for a new bond issue!
Capital Gains
Eliminating the federal capital gains tax sounds great. If you have a big gain on your house or on your investments you won’t have to pay any tax when they are sold.
However, for many of us the capital gain on our personal residence is already largely exempt. And if you decide to spend some of your investment gains you will be taxed at the 23% rate instead of the current capital gains rate of 15%.
The Estate Tax
Eliminating inheritance taxes will be a blessing for family owned farms and businesses, but most of us won’t be affected. The current tax code phases out the estate tax in 2010, but will reinstate it in 2011 if congress fails to act. However, even with no further congressional action there will be a one million dollar exemption to the estate tax. So if your estate is one million dollars or less there will be no tax due under current legislation.
The Payroll Tax
Payroll taxes are inherently regressive affecting lower income people more that higher. What this does is shift the social security and Medicare burden to the general fund, which will largely be paid by middle-income families.
If you are unemployed or only receiving pension income you don’t have any payroll taxes, so you don’t get any benefit from this provision.
What about consumption taxes
What you don’t hear is that we already have “Consumption Taxes”. The many, many taxes levied on producers and manufactures, which they end up burying in their prices, comprise about 35% of retail prices. States will continue to add their “Sales Tax” on top of this.
The other thing politicians don’t talk about is how a “Consumption Tax” will affect those, mostly seniors who have built up a nest egg for their golden years. If this tax is implemented spending down that nest egg you have built up out of after-tax dollars will now be taxed again at the going rate of 23%.
If you’re an empty nester and want to down-size you home the gain you realized from the sale will be taxed at 237 as you spend it, even though you paid “after-tax” dollars for the home.
Of course some people will benefit. Those will large mortgages will be able to pay it off with untaxed dollars, while many seniors with small or no mortgages had to pay for it with after tax dollars. But first time home buyers and renters can expect to pay 23% more for a place to live.
The message is clear. Whenever politicians talk about changing the rule on anything, especially on “Tax Reform” or “Tax Simplification” hang on to your wallets. The one thing you can be sure of is that politicians are not talking about reducing government revenues, but new ways of increasing them.
Want to learn more about hidden taxes? Go to Americans for Tax Reform at http://atr.org/special/taxbites/index.html . Guaranteed. You’ll be shocked.