Would a fair tax system have a positive impact on our economy?

The status of our economy and our deficit is in need of a change to the method of taxation currently now in place. Our current tax system is without a doubt is cumbersome and confusing and businesses must have individuals dedicated to ensuring tax laws are not violated in operating their business or organization. Individuals also have issues with the present system in making sure they to do not violate tax laws. The current deficit is climbing as we speak and unless something changes in the structure of our government including the tax system it will continue to climb. Government must have the income to meet their present obligations but obligations can change if Congress takes appropriate actions.

In the new Congress according to some reports there appears to be an increase in the support for a fair tax system and a bill in the Congress was re-filed. The legislation is titled The Fair Tax Act. While this legislation has been re-filed in the House of Representatives with the increased support there is also increased support in the Senate. The main principles of a fair tax system is to eliminate income taxes, payroll taxes, estate taxes and gift taxes among others and replacing them with a fair tax system which addresses bringing in the income the government needs to function. Some may say this is drastic action with regards to our tax system but in these economic times drastic action is needed.

Our current tax system is a burden on both individuals and businesses. As previously stated our current tax system is cumbersome and needs to be simplified. One of the main objectives of a fair tax system is to simplify the tax code to reduce the burden on American citizens. Another point for a fair tax system is it would eliminate wasteful tax breaks for special interests and remove corporate tax loopholes. One of the changes in the recent fiscal cliff deal was to raise taxes on individuals and businesses who earn more than $400,000 and $450,000 for couples. Additionally a fair tax system would get rid of extra tax breaks for millionaires and cracks down on cheaters to close the tax gap.

Changing our tax system will not be an easy task but changes must be made. Those who understand a fair tax system as identified in the bill in Congress know it will provide additional revenue for businesses and individuals to spend. Spend is the key word in this picture. If we as individuals or business owners have more money available it would cause increased demand for products and services. The point to be made in removing income taxes, payroll taxes and estate taxes is that it must be replaced with something. The objective is to create a consumption tax. As individuals or businesses buy products or services it would mean more money for government responsibilities in addition to lower unemployment. The consumption tax as it is identified would apply to federal tax requirements and does not eliminate state or local tax requirements.

Some objectives of the fair tax system which some have identified is the uncertain amount of income the system would generate. The present tax system also has some uncertainty but current income taxes paid to the government can be tracked to know the amount of income being generated. I feel the same would be in place for a consumption tax. The amount of consumption tax to be imposed is in question as legislation progresses in Congress but the figures for GDP (gross domestic products) indicate an output of over $15 trillion while sales in the past have indicated a total of $5 trillion. Combining these two figures would be over $20 trillion our economy generates in a given year. Having a consumption tax applied to these entities could generate the necessary income the federal government needs to meet their obligations. Together with consumption tax there needs to be a decrease in government spending but common sense must be applied to the process.

Currently the 16th amendment identifies an income tax to be levied for the country. To resolve a problem with removing this amendment it could be kept in place by reducing income tax rates for all individuals to .01%. Tax rates can be changed by Congress without making changes to the 16th amendment. Granted imposing a consumption tax at a sensible rate would seem like we are paying more when purchasing products or services. While this may be true when comparing what we now have to spend and the income taxes we now pay each year we would have more dollars to spend for the things we need and want. As we spend the extra income more money would be raised to fund the government through the consumption tax. There will undoubtedly be some exceptions to a consumption tax which would adjust the projected income from such a system. The big picture needs to be examined as to the positive impact on our economy with a more simplified tax structure than the current one we have in place.

Having a fairer and more simplified tax system would promote economic growth, enhance productivity and increase international competitiveness. Economic growth is badly needed in our economy and while there may be some concerns about changing our tax structure to such a system it would resolve the uncertainty for businesses. Uncertainty for businesses is a job killer for our economy. Each year changes to our tax structure and rules/regulations. The present system creates uncertainty which prevents businesses from making investments or expanding their business in addition to hiring new employees. As more people are working more money is available to purchase products and services which under a consumption tax system creates more revenue for federal government responsibilities.

It is true that major issues are in need of resolution to our tax and spending culture in Congress. The financial status of Medicare and Social Security in addition to our deficit must be resolved. One aspect of a consumption tax system would be to apply some of the revenue to pay down our debt while applying the remaining revenue to federal government responsibilities. The current amount of laws and regulations which are revised or new ones generated must be reduced to reduce the burden on all taxpayers (individuals and businesses).

The information presented in the article is not an endorsement of a fair tax or consumption tax system as many details must be resolved to ensure adequate revenue is received by the federal government. Our deficit must be addressed in any revision to our tax structure while ensuring the services many individuals rely on are in place for today and into the future. Medicare and Social Security must be made financially sound through a combination of common sense changes and income applied to satisfy the needs of individuals far into the future.

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Comments 34 comments

ib radmasters profile image

ib radmasters 3 years ago from Southern California

Dennis

There can be no fair tax system as long as the Income Tax exists.

The 16th Amendment doesn't mandate an Income Tax it just legalized the Tax as not violating the apportionment across states.

So the Income Tax amendment can exist and the Income Tax System abolished, and replaced by a National Sales Tax that would be fair and equal by applying the same percentage rate to all. The mechanism is already in place in many of the state sales taxes.

In addition, the federal government needs to reduce spending, and shrink is size and scope. Give back to the states what they took away when they exploded the size and scope of the Commerce Clause that gave them their current power.

The current US Income Tax System is discriminatory, unequal, invades privacy, and ignores the self incrimination clause of the 5th amendment.

With the size and scope of the US Federal Government today, there is little need for the states. The states today are really begging for federal handouts to take care of their state.

This is not the original plan for the United States, it is one that congress has created over the last one hundred years.

SS and Medicare are Taxes paid only by wage earners, and we know that billionaires were not created through their wages.

When the rich pay their taxes on a higher income than most they would be paying more even if everyone paid the same tax rate.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Thanks for your comments. I understand what you have said and you made great points about giving back to the states.


rfmoran profile image

rfmoran 3 years ago from Long Island, New York

There are compelling reasons why a consump0tion tax would be preferable to our current income tax. My great fear, however, is that a future Congress, not pleased with the amount of revenue from the consumption tax, would su0erimpose an income tax on top of it in order to sponsor more government spending. Back to the future.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

rfmoran,

Thanks for your comments and I do agree with your comment about a futue Congress and superimposing an income tax on top of a consumption tax. The culture in Washington needs to change in reference to the spending that is currently taking place. Congress has certain responsibilities and there needs to be enough funding to satisfy the responsibilities according to the Constitution.


Dutchman3 3 years ago

The Fairtax scheme just can't work. The 2006 rate study failed to include a reasonable evasion allowance, and federal taxation of State and Local government operations is inappropriate if not unconstitutional. After adjusting the rate for those two factors, the exclusive revenue neutral rate would be in excess of 60%, and that won't work.

There is much else wrong with the Fairtax, but it doesn't matter. The Fairtax is going nowhere.

If you really want to get rid of the individual income tax, try a 9% VAT. Over 130 nations worldwide use the VAT, and it would work for us.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman

Thanks for your comments. While I understand your point of view with some questions and issues surrounding a fair tax system I believe it is the right approach for us as a country. There are always going to be differences of opinion and there will more than likely be long discussions about changing our tax system but the fair tax system has seen increased support in the new Congress.


Dutchman3 3 years ago

Dennis,

Would you still believe the Fairtax is the right approach for us as a country if the exclusive revenue neutral rate was 60%? What if I'm right?

As far as Congressional support, I'm always willing to wager $10 that the number of cosponsors in the House will not exceed the record number of 74 set in the 110th Congress. Any takers?


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

I would not agree the fair tax is right if the rate was 60% but I do not believe it will be that rate. In your other comment I am not sure what the total number of cosponsors are only that the support is growing.


Dutchman3 3 years ago

If you believe that the rate can't be 60%, then you must believe that the lack of an evasion factor in the rate study doesn't matter, and that it is OK for the federal government to tax State and Local government operations. As I wrote earlier, adjust the rate for those two corrections and the exclusive rate rises to 60%. Can you tell me why there would be little or no evasion under the Fairtax? And, can you explain just where the Constitution allows federal taxation of States? Aren't we a constitutional Republic with two sovereign government powers? Sovereign powers just do not tax each other. Check it out!


Sanxuary 3 years ago

When you actually get Corporations to pay taxes, I might say 35 percent is to high. First we have to get them to pay 10 percent or any taxes at all.


Dutchman3 3 years ago

Sanxuary,

Corporations did pay around $300 billion in income taxes on their profits last year. But surely you understand that those taxes were treated as costs by the Corporations and their prices were raised to cover those costs? In fact, Corporations don't really pay taxes, only we the people pay taxes and pay higher prices. The job of Corporations is jobs. Any tax reform should reduce Corporate tax rates to zero! Only then can our failure to compete on the international marketplace be corrected.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Sanxuary and Dutchman3 Thanks for stopping by and your opinion. Our tax system needs to be replaced or at least revised to provide more incentive for businesses to expand not penalize them for the expansion and making a larger profit.


Dutchman3 3 years ago

Dennis,

Your check-in after two months of silence led me to reread your original post. Two corrections for your consideration. (1) GDP is the market value of all goods and services in a given year. Your proposal to add $5 trillion in sales to our $15 trillion GDP is without merit. It's already in there! (2) You wrote about the benefits of the added income without recognizing that we will need the extra income to pay the higher retail prices. You are going to need that added income. "Real prices" will remain about the same. There is no free lunch!

I'm still waiting for your response to my Fairtax criticisms about the lack of an evasion factor in the rate calculations and the inappropriate proposal for the federal government to tax State and Local government consumption. Since you agree that a 60% retail sales tax would be unacceptable, you need to show that my criticisms are in error.

Thanks!


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman3

The taxes we pay to the federal government and the taxes businesses pay are a part of society as it is today. Businesses raise their prices in some respects to cover all their costs including taxes. If the tax rates were part of a fair tax system the amount businesses would need to charge would I beleve be reduced. Having more money in our pockets does not mean we would be willing to pay more for goods at the rate of 60%. Also under a fair tax system the way I understand it certain aspects would be exempted such as food. This would lower the cost we pay for the food we need on a daily basis. A consumption rate of 60% I believe would not be the result of a fair tax system. Looking at the taxes we pay to local, state and federal governments I feel would be reduced with a simple tax system across the country.

Thanks for your comments


ib radmasters profile image

ib radmasters 3 years ago from Southern California

Dennis

RFMoran made a good point about future congress.

In 1986 congress lowered personal taxes, and took away most of the deductions used by the middle class.

Then later they raised the taxes.

So for the National Sales Tax not to have the same fate, we need to abolish the federal income tax.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

I totally agree with your statement about abolishing the federal income tax but this is part of an amendment to the Constitution under amendment 16. Changing or abolishing an amendment to the Constitution can be a difficult and lengthy process but I agree it should be done. It takes a majority of states after Congress proposes an amendment to revoke another.


Dutchman3 3 years ago

Dennis,

Sorry, but under the Fairtax, the amount that retail businesses would have to charge will increase, not decrease. By removing business tax related costs , businesses could save around 10%, and after adding the 30% sales tax, retail prices have to rise by 17%. (1.00 x .9 x 1.30 = 1.17) That is why you will need that extra income in your paycheck. And, no, food is not exempted. All new goods and all services would be taxed except for education tuition. No nation has ever succeeded in implementing such a broad based national sales tax. Six have tried, failed, and switched to a VAT which has demonstrably lower evasion rates. The Fairtax can not work!

For your info, in order to repeal an amendment to the Constitution, it requires a two thirds vote in the House and Senate plus three quarters of the State legislatures. And, because all 50 Governors are opposed to any sort of a national consumption tax, repeal of the 16th Amendment is very unlikely!


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman3

The information and research I have done has identified in several pieces of legislation that food and other commodities would be exempted from a fair tax system. Also there is no defined percentage which would be in place under a fair tax system. The percentage is negotiable and has not yet been defined. Once that is accomplished whether there will be a real increase in taxes will be decided at that point.

To add another point the choice would be us as individuals where we pay a fair tax than having the government define how much we would pay based on our income. A fair tax system would be more fair as the choice would be ours and from information there would be some exemptions for certain population levels such as low income.

Thanks again for commenting and the information about what it takes to repeal an amendment to the Constitution.


Dutchman3 3 years ago

Dennis,

Now I am really confused. I thought your original post was about HR25, the Fairtax. But now it seems that you may be talking about a notional fair tax plan as yet unidentified. How else can I explain the numerous errors you make regarding the specific Fairtax scheme? For instance, HR25, the Fairtax, does not exempt food and other commodities. Only education tuition is exempt. In year one, the sales tax rate is clearly defined as 23% inclusive. Everyone is treated exactly the same under the Fairtax and there is no exemption for low income populations. In addition, your claim that you would have a choice as to when and how much tax you pay is vastly overstated under the Fairtax. Remember, all services are taxed and services are typically more than half of the family budget. There are no untaxed groceries or restaurant meals, no untaxed heating gas/oil for your home, no untaxed gas for your car, nothing untaxed at Wal-Mart, etc. etc. How much "used" (tax previously paid) stuff did you purchase last year? I couldn't identify any, and I'm not wealthy--that's for sure.

Please clear up my confusion. Have you been talking about HR25, the Fairtax, about which you seem to understand very little, or a more general fair tax plan as yet undefined?

Thanks!


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman3

Thanks again for your comments. The primary focus of this article was about a fair tax system with an emphasis on HR 25 but it was not intended to be a total reference to HR 25. In response to your comment about a 30% tax rate HR 25 does identify a 30% tax rate but it goes on further to talk about a rebate of the tax paid on a monthly basis back to consumers based on household size. This would lessen the costs consumers actually pay.

In respect to businesses if the corporate tax rate were eliminated they would have no need to raise the prices of their goods and services with the elimination of the corporate tax rate. True they would pay the same tax as other consumers but a fair tax system would be spread across the country.

It is unclear at this point whether a revision of the tax system will be totally achieved through HR 25 or a combination of other legislation. Reducing the burden on consumers of the income tax gives them more money to spend and thereby increases the revenue government would receive. It is a proven fact based on past data when income tax rates were lowered the government saw more income not less.


Dutchman3 3 years ago

Dennis,

That helps, but you still don't really understand the impact of the Fairtax on businesses. Based on 2007 actual data, businesses paid $290 billion in income taxes against retail sales of $9 trillion or a rate of 3,2% of sales. Businesses paid $522 billion in payroll contributions or 5.8% of sales. And businesses paid $147 billion in compliance costs or 1.6% of sales. Add them up and business tax related costs in 2007 came to 10.6% of sales. Remove the tax costs and add the 30% sales tax and retail prices will have to rise by 16.2% in order to retain the same margins. And, businesses don't pay the sales tax, they only collect it from the final consumer. Finally, the prebate doesn't lessen the costs consumers pay. The price on the shelf isn't impacted by the prebate. The prebate is a cash grant entitlement costing $600 billion annually, and can be spent or saved as economic conditions dictate. It is simply another welfare check that the nation can ill afford, imho.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman3

Thanks again for your comments. The information being circulated about a fair tax system is not always totally accurate. If a person is against such a system data will be generated to discredit it while those who support such a system has another set of data. The principle behind this kind of system is to simplify our tax system to make it more understandable. I am not saying the data you presented in your latest response is inaccurate but data can be misleading from both sides.

Our tax system today costs businesses money since they need dedicated individuals to understand the volumous pages of the tax code and any revisions or regulations associated with it. If we had a tax code that did not require individuals within businesses to keep companies legal with the tax system everyone would know where they stand. Today knowing where companies stand and for that matter individuals is a complicated process. Individuals do not know what taxes they will owe each year until they look at their income, family size and the rate after the allowed exemptions and deductions are calculated.

We need a more simple tax system and whether it is HR25 or a combination of other pieces of legislation it would be better than the system we currently have.


Dutchman3 3 years ago

Dennis,

I couldn't agree with you more, provided you apply equal skepticism to data both pro and con. I could write a book about some of the misstatements made on behalf of the much advertised $20+ million in research by AFFT. Marketeers tell only half of the story, and both sides are needed before making a commitment.

I've been at this for eight years and I believe I have a better than average understanding of both the pro's and con's of the Fairtax and HR25. I agree we need to simplify or replace the income tax system and have proposed a plan I call Fairtax-Lite. My plan addresses all the criticisms I have developed through study and debate over the years. It is basically a revenue neutral federal consumption tax that replaces just the income tax in two stages with no exemptions, no inventory tax credits, a targeted prebate at one tenth the cost of the Fairtax prebate, and is implemented over three to five years. I'd be happy to send you a copy of my plan as well as a three page list of all my Fairtax criticisms. Just email me at vanlinda777@gmail.com and I will respond promptly.

Cheers!


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

Dutchman3

Thanks for all your comments. I do not think we are as far apart as we thought given your last comment. Complete and accurate information is needed before any decisions are made with regards to our tax system and the changes being proposed.

I would be interested in seeing your plan. If you would like you can send me a copy through my contact link on my website or I can send you an email from my website email address and you can respond.


Dutchman3 3 years ago

Not having much luck with your contact link. Can we try email?


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

I will send you an email from my website email and you can respond.


Susan S Manning profile image

Susan S Manning 3 years ago

I'm also a supporter of the Fair Tax and I want you to know I appreciate this. I noticed in one of the comments here (and a few other places) claims that it will be too easy to evade the Fair Tax. As I understand it, limiting evasion is part of the point. Have you heard anyone describe just how it would be evaded?


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

I have not heard anyone describe how it would be evaded. The way I understand the fair tax system it would be difficult if not impossible to evade this type of tax system. Thanks for commenting.


Susan S Manning profile image

Susan S Manning 3 years ago

That's also my understanding. I am glad to have your perspective. Thank you for answering.


Dennis AuBuchon profile image

Dennis AuBuchon 3 years ago Author

I am glad we agree.


Susan S Manning profile image

Susan S Manning 2 years ago

I wanted to add something about evasion. I have no knowledge of the studies referenced, but from the research I have done it would seem the only real way to evade the tax would be to buy used goods. But those goods would have been bought new at some point and the tax paid so that's not really evasion either. Even though I can't imagine how, I'm sure somebody would find a way to do it. I cannot see how such evasion could possibly be more costly than income tax evasion. All those people currently earning income illegally and not paying taxes would pay a consumption tax when they spend it.

The other think I wanted to address is the 16th Amendment. I think I agree with those who say it must be repealed. I just don't think it would be a good idea to leave our legislators the temptation. One of the aims of the Fair Tax is to reduce the incentive for lobbyists. As long as the 16th Amendment exists, that incentive will exist. Personally, I'd feel more comfortable having it gone and not always looming in the background. If we do have to have one they can pass a new amendment, which would be much harder to justify and the process more transparent than quietly raising the income tax rate.

I do agree there may be a need for an additional tax. The 23% suggestion is based on current consumer spending levels, which would surely change if Fair Tax supporters are right about it's impact on the economy. It may go down or it may go up, and we may even find it's just not enough all by itself and needs to be supplemented. I just don't think an income tax would be the best way to do it.

Lately I've been trying to understand the Land Value Tax and how it would work. I've still got a way to go, but at this point it seems it might be a better supplement than an income tax, should we need one. The two would seem to compliment each other well.


Dennis AuBuchon profile image

Dennis AuBuchon 2 years ago Author

Thanks Susan for stopping by and providing your input and comments. I appreciate your input and taking the time to stop by.


Dutchman3 2 years ago

Please allow me to explain why evasion will be an important Fairtax consideration. Contrary to Fairtax claims, it only takes one, not two, to cheat on a retail consumption tax. We consumers may pay the sales tax, but we have no idea if the retailer actually forwards the revenue to the proper government agency. Without a dual reporting system,l evasion will run rampant at the very high tax rates envisioned. This is precisely why six other nations tried a broad based national sales tax system similar to the Fairtax, failed due to difficulties collecting service sales taxes, and switched to a VAT. Along with tax avoidance, evasion of 15% would be a conservative estimate. Anyone that believes that the new STAA will be able to audit 20 million retail businesses, is in for an unpleasant surprise.

By the way, I also believe the income tax needs to be replaced. I don't support the Fairtax because it tries to do too much, too quickly. I have proposed a simple 10% sales tax with no exclusions, no prebate, and no investment tax credits, which would replace just the individual income tax. At 12%, we could also replace the individual income tax plus the business income tax. Stay tuned!


Dennis AuBuchon profile image

Dennis AuBuchon 2 years ago Author

Dutchman3

Thanks for your input. It is unknown whether a fair tax system would be totally implemented or if some changes would take place to add some things you mentioned in your comment. We will have to see what changes if any will be forthcoming with our tax system.

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