Welcome to my blog where I discuss money, investing, politics, and anything else import in the world. I find it surprising that most people in their 30s have very little knowledge or interest in these areas. Of course everyone is interested in money, but very few take the time or have the discipline to properly save and invest it for the future or short term. For those who at least have the interest, I'll write about my experiences and methods of investing, and hopefully give you a head start in investing.

Sunday, January 13, 2008

The (Un) FairTax

The FairTax, as called by its supporters, is the solution supported by a number of the remaining Presidential candidates. In fact, it is not fair and really only benefits the poor and rich. While some aspects are interesting and it would probably save me some money on taxes, I can't support it as a real solution. It also has zero chance of being passed by Congress. From their website:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax -- administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

Kind of sounds great at first, doesn't it? Well, here are the bullet points and counter points

  • No taxes on income of any kind, instead it is replaced with a 23% consumption sales tax on new goods and services for personal use - no tax for businesses. So business purchases are exempt, sounds like a nightmare to enforce and book keep, not impossible but a big undertaking to implement. Also, hard to believe all the taxes collected from businesses can be eliminated and pushed to the consumer. Can the average consumer get used to paying 23% more for everything? There is a big psychological barrier here.
  • The prebate makes the FairTax progressive. The prebate is provided monthly to every worker with a Social Security number to offset necessities at a rate equal to the poverty income rate.
  • Retail prices no longer hide corporate taxes or their compliance costs, which drive up costs for those who can least afford to pay. So theoretically the consumption tax will be offset by the drop in prices. How long before a thriving black market springs up? I can see people flocking to buy goods from Canada and Mexico tax free.


The wealthy make out really well with this plan because this is a consumption plan. Typically the poor and middle class spend 100% of their income every month on goods and service, while the wealthier and upper middle class save and invest a portion of their income. The current 2007 tax schedule for an individual is:

Someone making an adjusted gross income (AGI) of $500,000 currently pays $154,074.25 or 30.8% in Federal income tax plus social security or 32%. Moving to the FairTax, they would only pay a maximum of 23%, but most likely would be at least saving and investing some portion of their income, say 50%. Their tax rate under the FairTax would only be 11.5%. Now the same calculation for the middle class, a family living off of AGI $65,000. For most families that is just enough to get by and they are not saving or investing any portion. For 2007, they pay $16,771 or 25.8%. Under the FairTax they will pay 23%, since they spend 100% of their income. So in this example, the poor pay 0% (because of the prebate), the middle class pay 23% minus the prebate and the wealthy pay 11.5% minus the prebate. Does this still seem fair?

The last evidence of unfairness is what about all the people who have utilized Roth IRAs, Roth 401k, 529 plans, etc.? They have already pre-paid the tax on their investments with the reward of withdrawing it tax free. Now they will again be taxed when they use it for purchases in retirement or for school. In fact, all retirement plans are made obsolete, as there will be no need for tax sheltered growth.

So who supports this? Of the candidates that are left:

Mike Huckabee

Ron Paul

The chances of a change in tax policy like this are worse than slim to none. Even if it mathematically made sense, the industry lobbyist for accountants and tax prepares would fight this like never before, as we're talking about eliminating an entire industry. Also, with very little support in Congress in either party, there is no way this would pass a vote.

By the way, I do like a few aspects of this proposal.

  • No tax on earnings, effectively taking the capital gains and tax on dividends to 0%
  • Only prebates for those with documented jobs and a Social Security number, remove the incentives for illegal immigrants
  • Eliminates the advantages of being "off the books"
  • Eliminates all estate planning issues, AMT, and many other types of taxes, but that is also why I find it unlikely to be fiscally feasible


pchanson said...

Before you write an article, you should research everything you put in it. All these facts and figures may or may not be correct, and whether or not they are is irrelevant where Ron Paul is concerned. You see, he doesn't support the "fair tax", so the entire premise of your article, at least as it pertains to Paul is worthless. 5 minutes on youtube would have easily demonstrated this because he has stated his position on taxes over and over again. Yes, Ron Paul agrees with a portion of what's written here. That portion is the elimination of the IRS and the income tax. But... where he differs is in what he will replace it with. HE WILL REPLACE THE INCOME TAX WITH ABSOLUTELY NOTHING. Not a fair tax, not a flat tax, nothing. There is nothing fairer than that. Unless of course you happen to be a marxist and follow the plank in the communist manifesto that calls for a heavy progressive income tax as a stepping stone to socialism. For any who doubt what I'm saying, spend a few minutes listening to Ron Paul and you will hear him say it himself. He says it in every stump speech and has said it in a few debates as well.


Paul C. Hanson

Andrew said...

What is wrong with a new tax model saves consumers millions of dollars in compliance costs and millions of hours in frustration? The FairTax is an awesome idea!

J.D. Fournier said...

Ron Paul has certainly said he will vote for the FairTax if it comes up. See http://easylink.playstream.com/fairtax/RonPaul-FairTax.wvx

It may not be his prefered solution, but he definitely would support it.