10 Pros and Cons of the Fair Tax
The idea behind the fair tax is to eliminate the federal income tax and replace it with a national sales tax. There are some strong opinions on both sides of the fair tax issue so I thought I’d share a few of the pros and cons. It is not a flat tax, though I think that would be more fair than our current system as well.
1. Pro: The fair tax is much easier to understand than the current convoluted tax income tax system. When an entire industry (tax accountants) has been created to understand paying taxes, there is a problem. The picture below is Representative John Linder holding the 132 page Fair Tax Act in contrast to over 60,000 pages of U.S. tax code.
2. Con: That industry would be completely destroyed, and many jobs in the IRS would be lost. There would still be jobs to work on taking in the money, but many less than what is needed currently.
3. Pro: Transparency. Transparency in government is always a good thing. With over 60,000 pages in the current tax code, most people have no idea what is in it. What happens is the people who have more money pay accountants to find loop holes that get them out of paying taxes. Poorer people can’t afford the accountant so they just end up paying the base rate. With the fair tax it is easy to see that everyone pays the same rate on the things they buy.
4. Con: The sales tax would have to be pretty high to stay revenue neutral, i.e. bring in the same revenue for government as the current system. The bill that is currently in Congress is at 30% and independent groups have said the number is probably closer to 34%. This is a pretty large amount of money added to each thing we buy. This is especially true when you think of big ticket items. A $20,000 car suddenly cost $26,000. For somebody who has been saving under the current tax code, this would be a hard hit.
5. Pro: With a national sales tax, there would no longer be a tax on investments. This would obviously be really great for the stock market. There would be a lot of money that would come in from the sidelines and help turn the markets around. It would also encourage venture capital to invest in entrepreneurs to help fuel the American dream. Many jobs could be created with this new influx of capital.
6: Con: Along the same lines as number 4, the large sales tax would discourage people from buying things. Our economy is very heavily dependent on consumers, and a large sales tax would probably make some people spend less on things, save more, and pay off debt. Now, personally I would take almost all of that as a pro. In the long term it would be a benefit, with more people out of debt they could really stimulate the economy as opposed to spending money they don’t have which got us into the current mess. However, in the short term reducing consumer spending could have some impact, and this is an argument anyone against the fair tax will probably give.
7: Pro: The fair tax would hopefully increase productivity in our country. Currently, we have an income tax that gets progressively more burdensome the more money you make. This reduces the incentive to work harder and be productive the higher you move up the ladder. Taxing consumption makes a lot more sense than taxing production.
8: Con: The fair tax increases entitlements. From Wikipedia:
Under the FairTax, family households of lawful U.S. residents would receive a “Family Consumption Allowance” (FCA) based on family size (regardless of income) that is equal to the estimated total FairTax paid on poverty level spending according to the poverty guidelines published by the U.S. Department of Health and Human Services … Opponents of the plan criticize this tax rebate due to its costs. Economists at the Beacon Hill Institute estimated the overall rebate cost to be $489 billion (assuming 100 percent participation). In addition, economist Bruce Bartlett has argued that the rebate would create a large opportunity for fraud, treats children disparately, and would constitute a welfare payment regardless of need.
9. Pro: A huge pro of the fair tax is it would significantly broaden the tax base. Illegal activity (such as selling drugs) that creates large amounts of income would now get taxed. Under the current system we just get lots of rich drug dealers. Under this system they now get taxed every time they buy something. Along the same lines, this would also tax illegal immigrants. This would go a long way towards solving the illegal immigration problem.
10. Con: Opponents of the fair tax claim it could create an underground economy of people trying to evade taxes. Under a sales tax, intermediate goods that are a part of production would not be taxed. This creates potential for businesses to claim something is an intermediate good when really it is the end product that should be taxed. This would however constitute evasion and the bookkeeping that would be mandated for businesses should prevent most of this.
Overall I think the pros significantly outweigh the cons for the fair tax. I think the idea of taxing consumption instead of production makes a lot of sense, and taxing illegal activities and illegal immigrants sounds great to me. However, nothing here can solve the real problem that we have. The thing that needs changed is the out of control spending habits of our government. Until that is curbed, how we pay taxes isn’t the big issue.
Let me know if you support the fair tax or not and why in the comments below.
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