The Fair Tax and the Insatiable Beast – the IRS
“American workers spend more of their day working to pay taxes than to feed, clothe and house their families”
Saying Goodbye
Saying goodbye to the income tax and the IRS, Social Security tax, the Medicare tax, corporate income taxes, the death tax, the self-employment tax, the alternative minimum tax, the gift tax, capital gains taxes, and tax audits is the subject of this article. It can all be done with the passage of the Fair Tax.
A Bit of History
On February 12, 1913 the Sixteenth Amendment to our Constitution was ratified implementing the income tax. In the beginning, only one-half of 1 percent of American income earners actually paid any income tax. In 2003, the last year for which figures are available, the top 52 percent of all income earners paid virtually 100 percent of all personal income taxes collected by the IRS. But the cost of our current system of taxation goes far beyond the actual taxes remitted to the U.S. Treasury.
The Tax Foundation’s latest estimate is that individuals, businesses, and nonprofits spent 6.5 billion hours complying with the tax code, -- an effort that cost an estimated $194 billion. Oh, and don’t forget the roughly 100,000 people who work for the IRS, chewing up a budget of more than $10 billion a year.
Corporate Taxes
When it comes right down to it, no corporation or business really pays taxes. The burden – all of it — falls on us. There is only one entity in this country that actually pays taxes, and that entity is the individual. Businesses merely collect the taxes from individuals and pass them on to the government.
An extensive study of tax costs was completed a few years ago by Dr. Dale Jorgenson, then chairman of the
Harvard Economics Department. On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes.
The Fair Tax
The fair tax, in essence, is a national retail sales tax that replaces the following taxes:
The individual income tax
The AMT
Corporate & Business income taxes
Capital Gains Taxes
Social Security Taxes
Medicare Taxes
The Self-Employment Tax
Estate Taxes
Gift Taxes
In short, the Fair Tax is a replacement for—not an addition to—our current federal taxes.
Under the Fair Tax, consumers will pay an imbedded personal consumption tax in the amount of 23 percent on all goods and services sold at retail level. The 23 percent tax will not be imposed on the sale of used or previously owned items.
Additionally, the Fair Tax treats everybody fairly—lower income Americans included—because the federal government will send every family in America a prebate (an advance rebate) to cover taxes on the basic necessities of life. Every head of household will receive this prebate every single month, to reimburse every American family for the sales tax that family will pay on all spending up to the federal poverty level.
Think about it, if you buy something, you pay taxes. If you work, save, or invest, you don’t.
Do you remember earlier in this article about the embedded 22 percent tax in everything we buy? One of the beauties of the Fair Tax is that the price of consumer goods and services in our economy will go down by roughly the same amount as the proposed Fair Tax rate of 23 percent. This very nearly makes everything a wash.
What Happens After?
So let’s say the Fair Tax is adopted tomorrow. What happens to the American economy? Economists estimate that in the first year after the Fair Tax Act becomes law, the economy will grow by 10.5 percent. Exports will grow by 26 percent. And capital spending will increase by more than 70 percent.
Crunching the numbers, it is estimated that if the United States had been operating under the Fair Tax, government revenues would have increased in fifteen of the past sixteen quarters.
Furthermore, virtually every economic study on the Fair Tax proposal concludes that people from one end of the economic spectrum to the other—from the poor to the rich—will either start a savings and investment plan or increase the one they already have.
So What Can You Do?
Congressman John Linder first introduced the Fair Tax Bill (H.R. 25) in 1999. Since then it has continued to gain support and now has 54 co-sponsors. A similar version has been introduced in the Senate. It is Senate Bill S.25.
If you’re tired of our current system and would like to see it replaced with the Fair Tax, the first thing you should do is go to the web site www.fairtax.org. There you will find comprehensive information about the Fair Tax Bill and how you can support it.
One of the best things you can do is to write your Congressional Representatives. At the above mentioned web site you can find a link entitled“write your representative”, which will help you in this regard.
We gave the income tax a try, and it proved wanting. All efforts at reform have failed. The income tax punishes incentive and achievement and rewards those who know the ropes inside the Beltway. If you’re tired of a system that in the words of Congressman Linder “crushes entrepreneurship, punishes achievement, and discourages capital formation, then I urge you to get behind the Fair Tax.
By the way, the world’s tenth and fifteenth largest economies are already using a retail sales tax to support their governments. Who are they? Texas and Florida
A Separate Note
When speaking of the federal budget and the deficit, you’ve no doubt heard reference to a Trillion dollars. This number is so large that it’s hard for a normal person to really comprehend . Here’s my try at helping you understand just how much a Trillion Dollars is:
If you started a business on the day Jesus was born and lost $1 million per day, through yesterday, it would take you another 734 years to lose $1 trillion.
Invitation
If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call.
I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.
Marshall Sitarik - CFP
Ph. 407-977-3800