The FairTax Book

I've long been an advocate for some sort of change to our existing tax code. Even if my tax rate (which I do think is far too high) stayed the same, something simpler is necessary. It's so hard to look back and identify what I actually pay in taxes or with all the different taxes that I do pay, when I actually pay taxes. I pay income tax, dividend tax, property tax, sales tax when I buy things at sometimes varying rates depending on what type of item it is. I pay withholding taxes, ad valorem taxes on my automobiles, taxes on the plane tickets I purchase, the hotels that I stay in, and recovery fee taxes on my phone bill. What a mess! FairTax doesn't change all of this unfortunately but it does take a big step in the right direction.

Here's a very high level look at FairTax:

1. No more income tax on individuals or businesses
2. A new consumption tax, similar to a sales tax
3. The tax is charged only on new goods and services - no tax on used goods or items purchased for resale
4. All people are taxed at the same rate - no more progressive tax system
5. Every family receives monthly check called a "prebate" which negates the taxes that a family earning income at the poverty line would pay on goods and services

Here's a kind of step by step look at what happens now and how that changes after FairTax is implemented:

1. I feel that I should be able to make $10/hour for the widgets that I produce.
2. Unfortunately I have to pay taxes on the $10 so instead of taking a job where I make $10, I need to look for a job where I make $13 so I can afford to pay my taxes and still have my $10 to live on. I actually take home $10 and the government takes $3.
3. In addition to the taxes that I have to pay on my income, my employer also has to pay taxes on my behalf. That means it may actually be costing my employer closer to $14 to employ me.
4. The employer has to set to price of widgets at $1 rather than $0.78 to account for the difference between the $10 that I feel like I should be making and the $14 that it actually costs the employer to employ me.
5. That difference between $0.78 and $1 is called an embedded cost. Economists estimate that there's an average of a 22% embedded costs in all of the goods and services that we buy today (hence the $1 and $0.78 in the example - a 22% embedded cost).
6. When FairTax is implemented, embedded costs disappear across the board. Instead of me charging my employer $13 for my services instead of the $10 in order to pay my taxes, I can go back to charging my employer just $10 or somewhere between the two.
7. Now instead of my employer charging $1 for the widgets, he could charge the $0.78 that it costs him to make them.
8. I say could charge because here's where the consumption tax comes into play. FairTax proposes a 23% inclusive tax on all new goods and services sold. That tax will push the cost of the widget from $0.78 to $1.01 leaving the cost of the item virtually unchanged from the $1 you're currently paying.

As you can see from this rudimentary example, after FairTax, I'm going to be taking home roughly the same amount of money. The goods and services that I consume will cost roughly the same. The big benefit is that I no longer have to file any tax returns! I don't have to hire an accountant to file my taxes for me. I don't have to track down every little deduction and save receipts. I don't have to worry about being audited.

In addition to the benefits that I get to experience, the country will benefit. Currently illegal activities and illegal workers are completely untaxed. They pay nothing. FairTax doesn't encourage or even allow illegal activities but it does make sure they're taxed. Currently if the income I earn is earned illegally, I'm certainly not paying taxes on it (think Al Capone here). Under FairTax, the income isn't taxed but any goods and services that I purchase with that income is taxed! Think about it. If I make $50,000 illegally then I'm currently paying no taxes. Under FairTax, I'm going to pay those taxes when I decide to go out to dinner or buy groceries or clothes or anything else I spend my money on. The government collects an additional $11,500 under FairTax. Experts estimate that the underground economy in the US is billions upon billions of dollars per year. That's additional revenue under FairTax. In the same way, visitors to the US who earn no income here also pay taxes when they stay in our hotels, visit our theme parks, and shop at our malls. Because our tax code is simplified it will also encourage the investment of foreign capital. Economists almost unanimously predict unprecedented growth under the FairTax plan.

As you can hopefully see by now, there are a lot of good things about the FairTax system. So what's the bad? Well, honestly, there's not much. It's going to put a lot of current IRS employees, accountants, and lobbyists out of business. It's also going to take away a lot of power from politicians. Currently they can make a change to the existing tax code to favor a particular group of people and hope that group repays them with a vote. FairTax removes this political temptation and keeps the tax code equal and fair for everyone. You'll hear a lot of these groups complaining because of these things but check out the book. It's time for FairTax.