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PaperclipPerfector  1yr ago (text post)   36336 thread views

Culture War Roundup for the week of April 10, 2023

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The FairTax proposal aims to replace the current income and payroll tax system in the United States with a national consumption tax. The idea behind it is that instead of taxing income, it taxes consumption, so people are taxed on what they spend, not on what they earn. This proposal is intended to simplify the tax system, increase economic growth, and promote fairness and transparency. FairTax supposedly works like:

  1. Elimination of income and payroll taxes: FairTax would eliminate all taxes on personal and corporate income, including capital gains, dividends, and payroll taxes. This means that individuals would no longer have to file income tax returns or pay taxes on the money they earned.

  2. Replacement with a national sales tax: To make up for the lost revenue due to the elimination of income and payroll tax, FairTax would implement a national sales tax, which would be levied on all new goods and services at the final point of purchase, meaning that it would apply only to retail sales (business inputs would not be taxed). The proposed tax rate is 23% on a tax-inclusive basis (this translates to approximately 30% on a tax-exclusive basis).

  3. Prebate program: To counter the regressive nature of a sales tax, FairTax includes a "prebate" system, where every household receives a monthly tax rebate based on family size. This prebate would be equal to the amount that a family living at the poverty level would pay in sales taxes. This aims to prevent low-income families from being disproportionately burdened by the sales tax and to, in effect, make the first portion of every citizen's consumption tax-free.

  4. Elimination of corporate taxes: FairTax would eliminate corporate taxes, resulting in a more competitive business environment, both domestically and internationally. This could encourage foreign investment in the United States and reduce the incentive for corporations to move their operations to countries with lower tax rates.

  5. Border adjustment: The FairTax system would impose taxes on imports but not exports, known as "border adjustment" or "destination-based taxation." This means that exported goods would be exempt from US taxes, while imported goods would be subject to the FairTax, thereby leveling the playing field for domestic producers.

  6. Simplification of the tax code: By eliminating income and payroll taxes and establishing a single sales tax, the FairTax system would simplify the tax code, potentially reducing compliance costs and tax evasion.

  7. Encouragement of savings and investment: By taxing consumption rather than income, FairTax would encourage people to save and invest more because savings and investments would no longer be subject to taxation. This could lead to higher economic growth and prosperity.

Proponents of the FairTax argue that the system would lead to increased transparency, economic growth, investment, and job creation, while reducing the power of special interest groups and eliminating loopholes in the current complex tax code. Critics contend that FairTax might disproportionately burden lower-income citizens, fail to generate sufficient tax revenue, or even unintentionally incentivize a thriving black market.

At any rate, the simplification of the US tax alone system seems worth it, regardless of the other benefits!

Isn’t this tax extremely regressive? As in the poor would be taxed a vast majority more % on their taxes than the wealthy?

Well no, because the poor effectively wouldn't get taxed (see point 3). But also, I don't really think it's a bad thing if we have a completely flat tax. It's not "regressive", it's fair. It's not a hill I would die on, but I don't think the usual arguments as to why we should tax the poor less are particularly persuasive.

But doesn't that money have to be spent at some point in order for the owner to derive benefit? It's taxed now or later. In the long run, it should be a wash.

I think you’re thinking of it like a VAT, 30% on top of what’s already asked at the register. It’s actually a replacement of existing “embedded” taxes, referring to how the consumer’s prices are already hiding the cost of the employees’ income taxes.

The 30% is adjusted out of the initial price by law during the transition year. Since companies will no longer pay employees the amount which goes to FICA and employment taxes, they’re expected to drop baseline prices and then add the tax back in. The resulting prices are equivalent, and anyone caught gouging will be fined harshly.

EDIT: Whoops! I added that last bit myself from a half-remembered statement. The actual penalty provisions of the bill are plain and limited, as you can see. What it mainly comes down to is that nobody except businesses will have to fear the tax man, and the bill deliberately makes compliance so conceptually and logistically easy that Etsy sellers and Tupperware consultants can do their own taxes.

transition year

anyone caught gouging will be fined harshly

The text of the bill appears to include no such provisions. (And there's nothing wrong with "price gouging" in the first place.)

As a free-market libertarian, I generally agree on "price gouging" - the real value is what the market pays. However, there is a moral risk of a bunch of companies just raising their prices precipitously and blaming the FairTax: "It's not our fault, it's the government." Therefore, there are provisions for transition relief.

When I heard it on the radio over 15 years ago, it was phrased in terms of price gouging; it's actually found in the text of the bill in the form of an inventory tax credit to avoid double taxation (and thus avoid price gouging). Here's an article on the transition rules from the people pushing the FairTax, or hear the article read aloud in a 10-minute YouTube video. I've included the URL here ➡ with a time-stamp for the three explicit transition period rules, and pasted the relevant one below:

First, since inventory is not deductible under the income tax until it is sold, existing inventory will have been acquired with after-tax dollars. To then subject inventory held prior to the effective date of the FAIRtax to a sales tax would constitute double taxation and disrupt markets. Businesses that have inventory held on the date prior to the enactment of the FAIRtax qualify for a “transitional inventory credit” if the inventory is sold subject to the FAIRtax within a two year period. Qualified inventory shall have the cost that it had for federal income tax purposes for the active business as of the end of the final income tax year. The credit is equal to the cost of the qualified inventory times the FAIRtax rate.

To ensure that the inventory credit can follow qualified inventory through the supply chains, businesses may sell the right to receive the inventory credit. The inventory credit indirectly allows for a transitional period for manufacturing and retailing to adjust to pricing without the inclusion of income and payroll taxes, corporate taxes, and compliance costs that before the FAIRtax were a large percentage of the cost passed along to the consumer. This means being able to keep some prices the same immediately after the effective date and then change prices over time, removing the inducement to buy or sell just before the effective date.

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