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Should the US Consider a Fair Tax?

Is The US Ready for The Fair Tax?
(Joe Raedle/Getty Images)

The Fair Tax is almost as complicated as the current progressive income tax we all know and love. And like the other tax possibilities we’ve looked at, there are pros and cons to this one as well.

The Big Plus

The biggest plus of the Fair Tax, and one that is very popular with those who are not big fans of government is, the elimination of the Internal Revenue Service. Many citizens believe the IRS has no legal authority to levy and collect taxes on personal production anyway. So this program would make them very happy. Unlike the current progressive tax system, or the Flat Tax plan, the Fair Tax works like a sales tax, with some interesting twists.

The goal of the Fair Tax is not only to eliminate the IRS, but all federal income taxes, (including the Alternative Minimum Tax), all payroll taxes (Social Security and Medicare), corporate taxes, capital gains taxes, gift taxes, and estate taxes. It would replace those taxes with a national (Fair Tax) sales tax of 23% on purchases of new retail goods and services for each dollar a consumer spends.

Households of legal residents, regardless of income, would receive a “Family Consumption Allowance” based on the size of their family that would be equal to the amount of Fair Tax paid on poverty level spending guidelines determined by Health and Human Services. Any increases would be tied to inflation — except for food and gas of course.

The Check is In The Mail

In addition to the FCA, eligible households would register with Social Security and, are you ready for this, receive 12 monthly paper checks, direct deposits or a re-fillable debit card. Why are you getting this generous monthly benefit called a “pre-bate?” In simple terms, the government is going to send you a check, to help you pay the taxes they are going to collect, from the business owner when you buy something. My head is beginning to hurt.

Taxpayer Effects

According to a Boston University study, the possible effects of the Fair Tax showed purchasing power increases of 26.3% in the low-income class, 12.4% in the middle class and a very modest 5% in the most affluent income range. I don’t think the 99% would have a problem with the rich receiving 5% more buying power if theirs was almost 6 times that.

The theory is, with this type of tax, almost everyone would pay something. Kids on the way home from school buying soda or candy would pay. Tourists from all over the world would pay on every new retail purchase. And, to soften the blow, the 23% would be included in the selling price, not added on at checkout. So if something is $100 on the shelf; it’s $100 at checkout. However, there is one small downside.

The Cost of the Program

If the Fair Tax were to be implemented, it would be, by far, the largest entitlement program in history. In addition, it would be the equivalent of sending “monthly welfare type checks” to most of the country perpetuating a perceived dependency on government.

Conservative cost estimates, and we all know how reliable those are, would be in the neighborhood of $600 billion per year. Another big number — what does it mean? Six hundred billion dollars would cover the combined budgeted spending for: Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Housing and Urban Development and Interior. That’s a lot of Pre-Bates.

The Bottom Line

There is a line at the end of the 1980’s era movie, “War Games” that might work here. “A strange game. The only winning move is not to play.” Changing the tax codes are a lot like playing Russian roulette in reverse. Seems like government wants to load all the chambers but one, instead of the other way around. Even if we eventually do decide on one of these plans, there’s still a good chance our wallet will end up with a hole in it.

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