First let's take a look at what Fair Tax means. The tax would replace all other income taxes, including the taxes that you might not be aware you're paying, such as payroll taxes that are currently collected and delivered to the Internal Revenue Service (IRS) by your employer. If you're self-employed, you already know this is a tax that's more than 15 percent; even if you're employed by a company, you're getting 7.5 percent or more deducted from your paycheck on a regular basis.
What you might not know is that your employer is matching that deduction and paying another 7.5 percent to the IRS, meaning that the total taxation on you, just from employment taxes alone, is around 15 percent. These are estimates, by the way, I know the actual numbers are higher, but I'm trying to simplify this just to make it easier to follow.
So if the Fair Tax became law, the first thing you would notice is that you would experience an immediate 15 percent raise, because it would cost your employer absolutely nothing to raise your paycheck by 15 percent, since they're already paying that (in combination with your contribution) to the IRS.
Thus, your take-home pay would grow by 15 percent right off the bat. The next thing you would notice is that, at the end of the year, you wouldn't have to pay more taxes to the IRS. The IRS also wouldn't be deducting or withholding money from your regular paycheck like they do today. You would be getting your full paycheck every time you were paid, and you would no longer see massive deductions for federal tax that the IRS takes out of every paycheck that you get.
In effect, whether you realize it or not, you are paying a large chunk of money to the IRS. That might anywhere from 15 percent to 35 percent, depending on your current income level. Like all Americans, you are paying a significant portion of your income to the IRS whether you realize it or not. And when the Fair Tax is put in place, this money would come directly to you so that you could decide what you wished to do with it.
The next important point about the Fair Tax is that it would make all goods and services less expensive (initially). When you go to the grocery store and buy groceries, you would find them to be a lot less expensive. That's because there are taxes on all of the foods and grocery products that you purchase. And this is true across all products, not just groceries: automobiles, recreational products and services, travel, housing, clothing and so on.
Every product or service that you purchase has a much higher price than it normally would because the providers of those products and services are also paying payroll taxes for their employees, and their employees are paying additional taxes. So, if you add up all of these taxes, the prices on the products and services that you're buying today are actually inflated by the accumulation of all of these hidden taxes. These hidden taxes would disappear under the Fair Tax.
So far, then, with Fair Tax you're taking home a lot more pay. Let's say right now you're taking home $1,000 / week, and you're paying a 35% federal income tax rate. That's $350. Under the Fair Tax, you'd get to take home your full earnings: $1,350 / week.
Furthermore, the money you take home will actually go further because the products and services that you purchase will be less expensive. Sounds good so far, right? But the obvious question is, "How does the federal government raise revenues to fund itself, then?"
Let's get to the part of Fair Tax where you're actually paying the tax. This works by implementing a national retail sales tax on all products and services purchased in the U.S.
Based on current estimates, there would be approximately a 20 percent sales tax on all goods and services. This means if you go out and spend $100 on groceries, you would pay an extra 20 percent in federal sales tax. So, even though you're taking home 35 percent more money, potentially, and the products are perhaps 10 percent less expensive than before, you are paying a 20 percent tax on those products, making them ultimately 10 percent more expensive than they are today. Once again, these are just rough estimates, and the actual numbers could vary.
But the bottom line in all of this is that you are taking home a tremendous increase in pay and you're only having to expend perhaps 10 percent more when buying goods and services as part of your daily routine. The net savings to you is tremendous; you will have a lot more money in your pocket.
Meanwhile, the federal government will not lose revenue at all -- the 20 percent sales tax will give it approximately the same overall revenue that it's generating today. Why? Because people consume so much. Americans like to spend. And every dollar they spend sends another twenty cents to Washington.
That's the financial part of the Fair Tax, and that alone is a good enough reason for most people to support the tax. But there's a lot more good news behind the Fair Tax as well. First off, one of the criticisms of the Fair Tax --from people who don't understand how it works -- is that lower income people would pay a larger percentage of their income to the federal government because they would spend a larger percentage of their income on food, closing, housing and so on.
But that's simply not the case. In the Fair Tax plan, there is a fixed rebate that goes back to each citizen each year. This rebate might be equal to $500 or $1,000 per citizen, and it would nullify the sales tax on low income people, meaning that they would end up paying absolutely zero tax. So this is the best tax plan of all for low-income people, since they would end up paying no tax whatsoever.
Essentially, the Fair Tax system is a tax on consumers -- that is, the more you buy and the more you consume, the more tax you pay. And yet, since every individual would get a tax rebate that would cover the normal expenditures for an average person, you only end up paying tax if you wish to consume more than the poverty level of consumption.
For example, if you wish to buy a more expensive car, or a bigger house, or five pairs of shoes instead of one, or expensive food items instead of more affordable food items, then you are going to be contributing tax dollars to the federal government.
One of the best things about the Fair Tax is that this consumption is your choice. In other words, you can choose how much tax you wish to pay by changing your consumption patterns. If you don't wish to pay much tax, it's very easy: all you have to do is live on the cheap. If you would like to fund the federal government with more dollars, you can simply choose to spend more.
And of course, wealthy people tend to spend a lot more money than lower-income people, meaning that it is the wealthy people who will be spending more money and paying more taxes to the federal government, just as it should be in a fair and just society.
And yet, even wealthy people will have the freedom to choose how much tax they wish to pay. If they would like to reduce their tax burden, they can simply lower their consumption and buy a Toyota instead of an Audi, for example, or live in a 2,000 square foot home instead of a 6,000 square foot home.
However, if they wish to live in a very large home, or drive a nice car, or wear a $1,000 suit, or carry a $600 purse, that is their free choice, and if they choose to live in luxury, they will be funding public projects that ultimately benefit low-income people who don't operate at that high level of consumption.
But there's even more good news with Fair Tax. Let's recap for a minute, though. First the Fair Tax replaces all of the taxes you're currently paying, in terms of payroll tax and federal income tax. It also initially makes goods and services cheaper because the manufacturers aren't paying all of those taxes either, so goods can be delivered to the retail stores at lower price levels. But it adds a 20 percent retail sales tax on all goods and services. There is an annual rebate that goes back to each individual, meaning that the Fair Tax costs nothing to poor people, and yet taxes people who choose to consume at higher levels. The Fair Tax also puts the freedom of choice in your hands, allowing you to decide how much tax you wish to pay by adjusting your level of consumption.
The next wonderful point about the Fair Tax is that it transforms the U.S. into the world's greatest tax haven. You see, right now a lot of capital leaves the United States because of the U.S. tax code. As even President Bush has stated, rich people already know how to avoid taxes, so they're not paying much tax right now. If you think the wealthy people are paying 30 to 35 percent tax, you're kidding yourself -- it's really just the middle class who are paying those burdensome taxes.
By switching to a Fair Tax system, we eliminate the taxes on investment in the U.S. This would bring in an avalanche of wealth to our shores, because suddenly the income is no longer taxed on that money, so investors and ultra-wealthy individuals would bring all of their billions of dollars from offshore accounts back into the U.S. to seek out new investment opportunities.
Those investment opportunities would be found in helping business owners invest in better business practices. A lot of this money would go to small businesses, into publicly traded stocks, and into new venture ideas that would create new jobs and create new employment for America. This is a fantastic benefit that is often overlooked when people discuss the Fair Tax.
In a sense, it would take all of these billions of dollars that are outside the control of the IRS, and bring them back into the system where they can be put to good use helping to create more jobs, better technology and more investment opportunities right here in America. The economy would benefit strongly from such a move.
And yet, that's not the last benefit to the Fair Tax. There are many other notable benefits. One of my favorites is that under the Fair Tax, you would no longer have to pay accountants and tax attorneys to shuffle paperwork at the request of the IRS. Today, there are literally billions of dollars in productivity wasted each year by individuals and businesses by simply trying to comply with impossible tax laws that are extremely difficult to understand and almost impossible to navigate, even by professionals that have been doing it for years.
For example, you can take a tax portfolio from a business and hand it to 10 different tax attorneys, and each attorney will come up with a different number that you owe the IRS. Nobody can actually agree on how much a business owes to the IRS, or how much an individual owes. Doing your taxes is complicated, and unnecessarily so. It is a huge waste of time, resources and productivity. It is a burden on the national economy that takes away income from you, your company and the nation as a whole. It is essentially funding an entire army of people at the IRS and accounting firms that do nothing but shuffle paper all day. They crunch numbers, they move papers around, they file papers, and then the IRS mails them back and requests more papers and levies penalties for filing the wrong paper, or for having the wrong number on the right paper.
It is a quagmire of insanity that needs to be stopped if we're going to improve the level of wealth and quality of life in this country. We have to stop spending time pushing paper, crunching numbers and spending billions of dollars each year hiring people to figure out how much we owe. It is an utter waste of time and energy that could be put to much better use doing something useful for our country, such as creating new business ideas or investing in new technologies.
Creating a Fair Tax system would eliminate all of this waste, and that waste, within a very short period of time, would be transformed into productivity for our country. Our GDP would rise, our productivity would increase and we would all enjoy a higher quality of life in the long run by adopting the Fair Tax.
All the reasons I've mentioned so far are excellent reasons to support the Fair Tax. But there's yet one more reason, and this may be the greatest reason of all. The Fair Tax would eliminate the IRS as it now exists. The IRS is an agency that engages in rather dubious practices in order to attempt to collect taxes from people. The IRS has a reputation for assaulting small businesses because they know that small businesses don't have the funds to defend themselves against tax inquiries. They also demand that all Americans transform themselves into packrats by saving every scrap of paper with a number on it for seven years (that's how far back the IRS can audit you).
I'm not against paying taxes; in fact, I think that it is absolutely essential that taxpayers help fund social programs and the operation of the government. And I've never been one to promote the avoidance of paying taxes. I just think that paying taxes should be fair and it should be simple. We shouldn't have to have a degree in accounting and the IQ of Einstein in order to figure out how much tax we're supposed to pay each year.
More importantly, we shouldn't have a tax collection agency breathing down our necks, using fear tactics to frighten us into tax compliance. That's not the kind of activity that should be going on in a free society. Since America is supposed to be a free society, we should have a simple, Fair Tax system that leaves it up to consumers to decide how much tax they wish to pay.
By simply adjusting their level of consumption, they can choose how much they wish to contribute to public funding. With the IRS gone from our lives, stress will be dramatically reduced among the American population; freedom will be in abundance; fear will be reduced; the burden of tax compliance will be eliminated; the choice of how much tax you wish to pay will be put firmly in your own hands; taxes on poor and lower income people will be eliminated; taxes will be raised on consumers and people who choose to live luxurious lifestyles; and billions of dollars in offshore money will come flooding into the U.S. to invest in U.S. businesses, entrepreneurs, ideas and technologies that can enhance our collective quality of life.
These are the reasons why I support the Fair Tax, and I urge you to support it as well, regardless of which politicians promote it. This is not a Republican proposal or a Democratic proposal. It is a proposal of freedom. And all Americans who wish to live lives free of the burden and cost of tax compliance, and who wish to take home a larger portion of their paycheck without being forced into having it stripped away every time they get paid, should support the Fair Tax as well.
Be sure to visit www.Fairtax.org to learn more about the Fair Tax.