Someone suggested switching from a federal income tax to a fair tax. There are many websites on it including this one called Americans for the Fair Tax. It’s a very interesting site, and tomorrow I’ll talk about the flat tax idea.
The fair tax basic premise is the idea that we should pay based on our consumption. The more we spend and consume, the more in taxes we will pay. How so? We’ll keep our paychecks but instead pay a 23% tax on everything we buy. It will replace federal income taxes, Social Security, Medicare, corporate, self-employment taxes. Proponents say we will be catching illegal immigrants who don’t pay taxes.
Also there will be a prebate for all families based on “poverty” determinations. But unfortunately this does not take into account differences in COLA, except Hawaii. Which we all know rents and price of goods vary greatly depending on where you live.
Here’s a couple of problems I see, first off, this definitely impacts lower middle class people. Yes people who are in poverty will be better off, but the middle class will bear the brunt of it. How else can you explain that they will be paying more for necessities (23%) and it’s a bigger chunk of their income than a “rich” family. I mean honestly a rich family can cut down if they make $500k/year, but a family making $50k? How much can they really stop consuming? We all can agree the less you make, the more of it is spent on necessities versus disposable income. So taxing necessities at 23% makes them more expensive to the middle and lower income classes of society.
Also we know that 50% of americans pay no federal incomes taxes now with child tax credits, standard deductions, etc. How will this save them money and still give the government tax revenue?
Second, how will you renege on tax treaties with countries whose legal immigrants work here and don’t pay taxes? I know people personally from China, Germany, Switzerland, and France who don’t pay taxes while here because they are paid by their governments and are still paying their taxes there. What happens to our tax treaties for Americans living there?
Third, how can you really prove that tax evasion won’t happen? At 23%, how will you tax purchases on the internet? Won’t people be buying things from abroad to save on the taxes and the lower costs of goods? Right now it’s too difficult to tax the internet purchases.
Fourth, where are the states going to get their cut? And they will want their cut. Will we still have state income taxes? Will they give up sales taxes in states and districts?
Fifth, yes there are illegal immigrants not paying taxes, but are they really making more than self-employed contractors who don’t pay taxes on all their income? These same contractors who come to my house and won’t take CC but only cash or check? Is it really due to CC fees or because they don’t declare all the income they make from contracting?
Sixth, won’t this mean savers will be taxed twice in the beginning? We were taxed on our savings, but then we’ll be taxed again when we pull it out to spend, with this new consumption tax? How will you differentiate between previously saved taxed money and newly untaxed saved money?
Sounds good in principal, but I see a lot of flaws in a fair tax plan. What are your thoughts?
5 responses so far ↓
1 Erin // Dec 30, 2009 at 11:36 am
Taxes in Costa Rica, where I live now (I’m from the States), are almost all based on fair tax. Personally, I love it. Not only is it fair, but it cuts down on consumerism — a great plus, in my book.
You have very valid points, but tax reform will always be a complicated question. I do believe that, if the government were to give the fair tax a fair chance, they could come up with solutions re: state taxes, tax evasion (insofar as you can really crack down), etc.
I’m sure I’m overlooking some of the issues re: the lower middle class, but it seems to me that they would still get by. I say this with the average Costa Rican in mind — they make less than $6000/year, but are well clothed, put food on the table, entertain themselves, etc. The malls here are not empty. Yes, cost of living is lower in CR, but goods are at least double what they are in the States. Again, it all boils down to choice: do I *really* need that new pair of pants or new kitchen gadget, or can it wait until I’ve saved up enough money?
And this brings me to what I like most about fair tax: it really makes me think about what I’m buying. No longer do I just pick something up because I can — there’s no Amazon.com, discount stores, or even cheapy yard sales here. Impulse buying is almost a thing of the past. Goods retain their value. My life is simpler, my home is virtually clutter-free, and it’s much easier to be frugal.
The biggest problem I see with a fair tax in the USA is that most people are dependent on credit for big purchases. (Credit cards are not as common in Costa Rica.) If the fair tax adds 23% to all purchase prices, people will be paying interest on that tax (and therefore leveraging themselves even more). That could be a recipe for disaster.
2 Kristy // Dec 30, 2009 at 2:19 pm
I like the fair tax. I think that it would lower consumption as well and make people think about their purchases. IN addition, there would be a refund on necessary purchases, such as groceries.
I have to say, I didn’t even think about the problems that would happen if credit were used for purchases…that would really suck for people who can’t control their spending.
3 Josh // Dec 30, 2009 at 4:58 pm
“I know people personally from China, Germany, Switzerland, and France who don’t pay taxes while here because they are paid by their governments and are still paying their taxes there. ”
Even with tax-treaties, I think you would still pay taxes like VAT if say you are an American working in Europe. It would alter the tax treaties but it is not an insurmountable problem.
“Third, how can you really prove that tax evasion won’t happen? At 23%, how will you tax purchases on the internet? Won’t people be buying things from abroad to save on the taxes and the lower costs of goods? Right now it’s too difficult to tax the internet purchases.”
If “Fair Tax” ever becomes a reality, then internet goods will have have it added as well. I wouldnt say that it is too “difficult” to tax internet purchases. It’s a more a question of whom get the revenue, right the stores that do tax internet purchases (those that also have a brick and mortar presence) do so based on the delivery address and the sales tax is collected for that address, but is this really fair, should the shipping address also matter as well. Also for the imported goods, customs duty would just have to ensure that one cannot bring in stuff to “evade” the fair tax.
“Fifth, yes there are illegal immigrants not paying taxes, but are they really making more than self-employed contractors who don’t pay taxes on all their income? ”
With the fair tax, these contractors will now have to pay more of the taxes that they should be paying since it is consumption based.
“Also we know that 50% of americans pay no federal incomes taxes now with child tax credits, standard deductions, etc. How will this save them money and still give the government tax revenue?”
I guess some people will face increased taxes with such a major overhaul of the tax system, also some people will have less taxes as well, I think they key thing is whether it is more “equitable” after than change than before.
Maybe one shouldnt have a society where 50% of the population pays no federal taxes, even if it is only minimal amount that they pay.
My two-cents on the topic
4 Mike Zoril // Dec 31, 2009 at 1:00 pm
I don’t like the idea of paying a 23% sales tax. I don’t like t he idea of paying any federal income taxes or any ss/medicare taxes either. So what’s the solution?
#1. Cut federal spending back to the amount we spent 9 years ago in the year 2000.
#2. Repeal all federal income taxes.
The government still would have enough tax revenue from other sources to balance the budget without adding to the debt.
5 LAL // Jan 1, 2010 at 3:34 pm
Erin, a lot of countries have VAT, but they still have income taxes. It doesn’t necessarily mean that they will collect the same amount. And there are always loopholes for the rich, which they are substantially more of here in the US than Costa Rica. Which in turn influences why a fair tax unfairly taxes the lower and middle classes.
Kristy, I think a lot of black market sales will occur and I also think that a lot of the rich will purchases outside the US, and avoid the tax but bring it back. It’ll be a legal loophole, not available to most middle class people.
Nope but it might make it less desirable to emigrate to the US. Josh, I do believe internet sellers would care. Or else they would do it now.
How would you address contractors or self employed people who pay as little as illegal immigrants because they are a cash based business? Or small business owner giving “cash” discounts?
I prefer a flat tax than a consumption tax for making everyone pay. Then we’d all pay fairly. Say 10-15% and then the rich could never say they paid unfairly, they pay a smaller amount but of all their income, they don’t get to shelter it.
Mike, interesting idea about repealing all federal income tax. Are you sure the budget could be balanced?
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