Republicans should support tax reform that stands a chance at passing, and working.
Congress may soon consider meaningful tax reform. Paul Ryan, the expected next Chairman of the House Ways & Means Committee has suggested in his budget, that both a flat income tax and the FairTax® should be considered.
I am a proponent of the flat income tax solution, and in this brief article I’ll set forth my summary comments. We are discussing tax laws, which by their very nature are complex matters and the devil is in the details.
To be enacted, change must be evolutionary not revolutionary.
If Congress enacts any tax reform, it will be an evolutionary Flat Income Tax. H.R. 1040 (S. 173 which differs slightly) offers a 17% single rate tax with about a $40,000 exemption for a family of 4. Business Income would be taxed on a simple basis to the owners. I suggest a 10% rate and no exemptions. It would repeal today’s Income Tax and Estate & Gift Tax, but not the SS/Medicare taxes (as the FairTax would). This at least retains the skeleton of today’s tax code while otherwise effectively gutting it.
People could file their tax returns (including business income) on 1 page in less than an hour, without the need of a CPA and no one would ever waste time and money restructuring their lives around a 10% tax. Those who have been paying tax would also think the tax system now operates more fairly.
No-one can predict future economic benefits. However, I think when people are freed of the hassle, time, and cost of dealing with their taxes, and when they realize they get to keep a full 90% of every dollar they earn, there will be an explosion of economic activity that will produce a great number of new jobs (especially if Congress ever rediscovers its backbone and reinstitute works requirements for welfare).
If taxpayers contact their representatives in Congress and tell them to Co-Sponsor H.R. 1040 with my amendments, we can achieve major change that would simplify our lives, save us time and money, greatly improve the economy, and reduce federal welfare expenditures.
The FairTax will never be enacted.
If the people who currently support the FairTax would surrender their idea that will never be enacted, those of us who support this more evolutionary approach would be more effective.
The FairTax is marketed by Americans For FairTaxation (AFFT), a national grass roots lobbying group. Its marketing consists of the repeated and continual churning out of superficial deceptive materials, supplemented by motivational emotional appeals.
As is required of any tax reform proposal, the FairTax claims to be able to raise the same amount of revenue (to be “revenue-neutral”) as the Congressional Budget Office (CBO) currently projects. However, FairTax economists assume there would be absolutely no illegal evasion or legal avoidance (including consumers spending less and saving more), which is patently absurd. Independent financial experts predict that evasion and avoidance would skyrocket, requiring a large increase in the 30% rate, or perhaps a new Income Tax to make up for the lost FairTax revenue.
The combined federal, state & local sales tax rate of 40-70% would spark a consumer revolt that would destroy our retail-sales sensitive economy, and create a giant new “Black Market.”
Notwithstanding the FairTax claim that it’s transparent, the FairTax contains approximately 15% in hidden taxes – mainly from additional federal, state & local taxes that will have to be enacted in order for those governments to obtain the funds needed to pay their required FairTax for their purchases.
While people would get a raise with the FairTax – taking home their full pay and paying no Income or SS/Medicare taxes – consumer prices would go up by 25-30%!
New Homes would cost almost 40% more, and down payments would be nearly 50%. That’s because banks would not lend on the 40% sales taxes, and would require the buyer to pay those up front, along with the standard 20% down payment.
FairTax supporters market their measure as being extremely “progressive.”
The FairTax redistributes more wealth to the poor via its prebate – a monthly check based on generously “assumed” amounts of poverty level spending.
The bottom line is that poor people:
- would pay no tax to support government operations,
- would pay nothing for their personal SS & Medicare benefits, and
- would receive a large tax welfare check.
The FairTax claim that the IRS would be abolished is untrue.
While the IRS as we know it today would apparently be eliminated, a new IRS called the STAA would appear, and it may be even worse if it decides to audit consumers. Far worse than that is the fact that the FairTax would act as a Trojan Horse for a new Income Tax to supplement the FairTax. That is, while the FairTax contains a laughable Sunset Clause by which it purports to disappear if the 16th Amendment is not repealed in 7 years, Congress has plenty of time to repeal that clause and — while the 16th Amendment is still in effect — enact a new Income Tax.
In spite of (or perhaps because of) this risky loophole, after 15 long years of marketing, The FairTax has only been able to gain only 75 House Co-Sponsors, many of whom probably would not even vote for it if it ever did come to a vote (which is unlikely in any case).
At sponsor Rob Woodall’s (R-GA) urging, the Joint Committee on Taxation (JCT) is currently “scoring” the FairTax (i.e., determining if it would raise at least the same amount of revenue as the Congressional Budget Office’s (CBO) projects today’s taxes would raise over the next 10 years). Interestingly, JCT reports only to the bill’s Sponsor, not to the public, but Rep. Woodall has suggested to FairTax supporters that changes may be necessary – an indication that the FairTax is “scoring” far short of the requirement for revenue-neutrality. In my opinion, that’s no surprise given its presumption that no one will evade or avoid paying, which as I’ve said, is wholly unrealistic.
To learn more about the detailed arguments against the FairTax, please visit my website where I have published several articles that dig much deeper into this issue than I’m able to do here.
Stephen C. Edridge is a retired lifetime tax consulting professional and attorney (JD, LLM in Taxation, CPA), with no financial stake in ANY tax system. You can contact Stephen here.