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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:
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.
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).
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.
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.
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.
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.
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.
Well thankfully I completely misremembered that part of the bill. See my reply on ToaKraka's fork above/below.
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