Friday, October 28, 2005

Why I Support the FairTax

Readers, critics, anyone whose eyes will traverse these words, take heed for the second American Revolution is near. This battle will be fought not with weapons, but with words. There will be no blood shed, but their will be glory for the winners and shame for the losers. The battle I speak of is over a relatively new idea known as the FairTax.

Devised by a group of Houston businessmen less than a decade ago and brought into the political landscape by Congressman John Linder (R-GA), it is simply the tax reform to end all tax reforms. H.R. 25 in the House, S.R. 25 in the Senate, the FairTax Act will revolutionize the way our national government collects revenue from the American taxpayer. No more will we sit on our living room floors fingering through receipts. No more will we hunker down in the offices of tax accountants trying to make sense of the mess our tax system has become. The FairTax will bring simplicity, and prosperity, back into the hearts and minds of every taxpayer in America. Indeed, it will bring money back into our pockets as well.

As I'm sure many of you haven't yet heard of this revolutionary piece of legislation, I will provide a short description to help ease the confusion from your troubled minds. Simply put, the FairTax is a consumption tax on all (no exceptions) retail goods and services. At a rate of 23% (pending further research and economic growth), it will be added inclusively to the price of all goods and services. By inclusively, I mean that a $100 jacket will net $77 for the retailer and $23 for the feds. This is important to remember, because many critics accurately claim the rate is to be 30%. However, this rate is exclusive. This means that the tax is added to the price of the jacket, not included in it. Therefore, the jacket costing $77 would ring up at $100, and the rate of $23 over the price of $77 would equal a 29.9% tax rate. Keep in mind, there is no difference in the revenue raised, but opponents of the FairTax will trumpet this 30% figure as a means of scaring people into with bigger numbers.

With the passage of the FairTax Act, every single federal tax known and hated by taxpayers across the nation will be abolished. These include:
  • The individual income tax
  • The alternative minimum tax (AMT)
  • Corporate and business income taxes
  • Capital gains taxes
  • Social Security taxes
  • Medicare taxes (along with all other federal payroll taxes)
  • The self-employment tax
  • Estate taxes
  • Gift taxes
Consequently, the most feared and hated government organization will be terminated: the IRS. Furthermore, April 15th will become just another spring day.

Why, you may ask, is all this necessary? What's wrong with our current system of taxation? Well, I'll start with a little piece of history. It wasn't until 1913 that America had an income tax installed in the Constitution. (I say installed because the original income tax was deemed unconstitutional because it stood in direct violation of Article I, Section 9 as a direct tax against the citizens of the United States.) Prior to that, all necessary revenue was derived via consumption taxes and tariffs on imported goods. When money was needed to fight wars, the government just raised taxes on liquor and tobacco, and the people were glad to show their patriotism by forking over a little extra money. Well, along came the tough times at the end of the 19th century. As many have come to know, when the economy heads south, government takes it as a signal to take more of our money. The politicians used panic as a way to gain support for their income tax, which they aptly named in the spirit of governmental honesty, "An act to reduce taxation, to provide revenue for the government, and for other purposes." Passed in 1894, with a handy exemption for the politicians, this law started a chain of events that led to the Sixteenth Amendment and the creation of a permanent income tax. President Grover Cleveland wasn't convinced the law was constitutional, and thus let it become law without his signature. The debate over constitutionality was left to the Supreme Court, which summarily declared the income tax in violation of the Constitution.

Fast forward nearly two decades to 1913, where the fight for a constitutional amendment is at its boiling point. Democrats passed it off as a way to "soak the rich" and assured the poor and middle classes that it would leave them untouched. Republicans were simply opposed to the tax on principle. Nevertheless, a conservative Democrat playing a game of partisan politics decided to create the amendment as a means of humiliating Republicans and painting them as hostile to the poor and favoring the rich, a game which is still played today. However, liberal Republicans backed by Teddy Roosevelt pledged their support, and the bill flew through Congress with almost a perfect score (318-14 in the House, 77-0 in the Senate). Conservatives never thought it would make it through three-quarters of the state legislatures, but boy were they mistaken. Legislatures in the South and West passed it with the assurance that their constituents wouldn't be harmed, and on February 12, 1913, the Sixteenth Amendment was enacted.

As you can imagine, the original proponents of the income tax were dead wrong. Now the tax affects every single working American, rich or poor, black or white, there are no exceptions; if you work, you're taxed. This is why I support the abolition of every federal tax in America, and urge its replacement with the FairTax. Essentially, the income tax, as well as all other taxes apart from a tax on consumption, is a penalty imposed on the public. Income tax, payroll taxes, and corporate taxes all affect the worker, not the corporation. If a corporation pays taxes, it has to offset these costs by lowering other costs, i.e. wages, benefits, productivity, etc. Therefore, the burden of these taxes on the corporation are handed off to workers and consumers in the form of lower wages, fewer benefits, and higher retail prices. Research for the FairTax has shown that all the taxes imposed on businesses equate to an average of 22% which take the shape of embedded costs in retail goods. Therefore, as a result of the current tax system, around a quarter of our income is taken by the government, and our consumer goods are nearly that much more expensive.

Well, have no fear taxpayers, for the FairTax will relieve this tremendous burden. With the termination of all federal taxes, the competitive market will force down the price of all retail goods by that 22%, which in turn offsets the new consumption tax of 23%. However, the consumer now receives 100% of their paycheck giving them increased purchasing power and the ability to invest this new wealth without paying taxes on it. The creation of all this extra wealth will do wonders on the economy, especially considering that the hundreds of billions wasted on filing taxes every year will be eliminated. It is estimated that the tax system wastes nearly $500 billion (one-third of the money it even raises) in opportunity costs which include funding the IRS, paying tax accountants, tax planning for businesses, etc. No more will this money be wasted, but it will be plugged back into the economy in the form of increased investment, consumption, etc. This, according to research, will boost economic growth by 10% in the first year of the FairTax. That's pretty damn good news.

Furthermore, with the loss of all the embedded costs of production, businesses will bring jobs back home instead of shipping them overseas to tax havens where they can manufacture products much more cheaply. Right now, automakers like Chrysler have their operations in Germany as opposed to the United States because once their product is exported here from Germany, the government there refunds the Value-Added Tax (VAT) which is implemented at every stage of production. Here, however, exported products take the embedded costs with them, and have no way to compete with foreign products.

But don't take my word for it, I'm merely a sophomore economics student at UW-Madison. However, the man behind the bill, John Linder, has been a congressman for twelve years now. Along with talk-show host Neal Boortz, he wrote the FairTax Book, a short (182 pages) book that covers every possible aspect of the FairTax and even answers all the most popular questions of critics. I encourage everyone out there, taxpayer or not, to buy this book and tell everyone you know to buy it as well. The only way this bill will get passed is through a public groundswell in support of it. See, politicians know that big ideas scare people, and scared voters vote for their opposition. Thus, they need to see a grassroots movement before they lend their support for the bill. And this movement starts with you and me!

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