Fair Tax – A step in the right direction

Posted: February 12, 2011 in Politics
Tags: ,

How the Fair Tax Can Save our Economy
Jeremy Branham

A strong economy is important because less resources are being wasted, unemployment rates are low, and people are spending money. Implementing the Fair Tax can stimulate economic growth that will benefit people of all income levels. There are many ways this new tax system will change our economy for the better. Promoting domestic job growth, increase the exportation of American goods, reduce the tax on middle class Americans, and eliminate the taxation on poor Americans are some of the main reasons we should implement the Fair Tax as soon as possible. The Fair Tax also eliminates the income tax, gift tax, and other tax filings that our current system burdens Americans with. Putting more of people’s own money back in their hands can stimulate economic growth for families or persons of all income levels.

In 1913, the 16th amendment was enacted to allow an income tax that prior to the amendment an income tax was declared unconstitutional by the Supreme Court in the Pollock v. Farmers’ Loan and Trust Co case(1895). With the Fair Tax, the companion legislature will repeal the 16th amendment, making it once again illegal to tax income. According to the Executive Summary: The Fair tax The code will change from one that taxes income and innovation to one that taxes what Americans want taxed: Resource use and the consumption of new goods and services.” (Americans For Fair Taxation 2007) The 16th amendment is unconstitutional and until it is repealed, the government will continue to rob American citizens of their hard earned wealth.

 The current system of taxation has become so complicated and cloudy, it’s difficult to really understand how much we pay in taxes every time we clock into the job, or step up to the cash register. Creating a tax code that is more simple makes it easy to understand and transparent to the consumers when taxes are collected. As mentioned in United states tax reform in the 21st century

…many of the gains could also be achieved under an appropriate income tax reform. Nevertheless, we would stress that many important gains in simplicity can be obtained only under a consumption tax, especially those related to the elimination of a wide variety of timing issues (such as the determination of deductions for depreciation, inventory accounting, and the calculation of capital gains) and the need for inflation accounting. (Zodrow 2002)

The Fair Tax is a consumption tax that is initially 23 cents on the dollar for new retails products and services. Though this may seem high, this taxation is paid only once, where the current tax code allows new and used products and services to be taxed multiple times. In a 2001 tax analysis by the Institute for Policy Innovation,Federal income taxes represent only 42 percent of the total tax burden of U.S. taxpayers. The remainder is hidden, distorting taxpayers’ awareness of their real tax burden and of the true cost of government. Only fundamental tax reform with an emphasis on visibility can ensure a fair tax code that allows taxpayers to evaluate whether they are getting their money’s worth from government.”(Riley 2001) Since the Fair Tax is applied to the consumption of goods/services, “how does this effect the price of consumer goods” may be an important question to ask. Intensive studies indicate –

At a macroeconomic level, prices depend on how the monetary authorities react to changes in tax policy, macroeconomic conditions, and other variables affecting prices. In simple terms, the overall price level must be consistent with the ‘‘quantity theory’’ equation, whereby MV = PY. Here M is the money supply, V is the velocity at which money circulates, P is the price level, and Y is real income. For the purpose of this analysis, we assume that under the Fair Tax, V and Y would remain unchanged. Therefore, a rise in the price level would be possible only if accommodated by an increase in the money supply.18 Put another way, without monetary accommodation, prices faced by consumers under the Fair Tax would not rise. Any changes to the level of monetary accommodation — that is, increase in the money supply — would cause prices to increase in the same proportion. (Bachman 2006)

Economists differ, but most agree that income taxes depress the economy, consumption (sales) taxes grow the economy, and when you penalize productive behavior, you get less of it (Buccholtz 2008). With the current tax code, the more money you earn equals the more money the government takes from you. “The higher the tax on the next dollar earned (the marginal tax rate) the larger the disincentive.” (Arduin 2006). Thus the disincentive of being taxed more causes some Americans to work less.

Domestic job growth is also promoted by the Fair Tax. Since exported goods are not taxed, this will entice other countries to purchase more from the United States. Imported goods are still taxed so there is incentive to buy more American products and use less outsourcing. American companies will become more competitive, increasing capital available to build more manufacturing plants, etc… With the Fair Tax, payroll tax is eliminated, allowing domestic business owners to bring more jobs back from overseas.

Americans also retain all of their earned income with the Fair Tax. This allows them to pay taxes only when the money is actually spent. Therefore, rich people that purchase lots of consumer goods will pay more in taxes. Middle class and poor Americans’ taxes are reduced or eliminated. Families earning less than or up to the poverty level receive a monthly tax rebate, giving them more money to spend and middle class Americans can choose when to spend/pay taxes. This all helps create a strong economy which in turn creates wealth for citizens, and decreases the unemployment rate. Let us move towards a consumption based tax like the Fair Tax and strengthen our weakened economy.


 

References

Americans for fair taxation. (2007) Executive Summary: The Fair Tax. Retrieved from http://www.FairTax.org/PDF/ Fair TaxExecutiveSummary.pdf

Arduin, Laffer & Moore Econometrics. (2006, July). Ae add macroeconomic analysis of the Fair Tax proposal. Retrieved from http://www.FairTax.org/PDF/MacroeconomicAnalysisof FairTax.pdf

Bachman, Paul, Jonathan Haughton, Laurence J. Kotlikoff, Alfonso Sanchez-Penalver, and David G. Tuerck, “Taxing Sales under the FairTax: What Rate Works?” published in Tax Notes, November 13, 2006.

BUCHHOLTZ, R. (2008, February 7). Let’s talk Fair Tax talk [Letter to the editor]. The Washington Times, p. A20.

Riley, Schlecht, Berthoud (July 2001). Policy Report 160, Hidden Taxes: How much do you really pay? http://www.ipi.org

Zodrow, George R. & (eds), Peter Mieszkowski. ( © 2002). United states tax reform in the 21st century. [Books24x7 version]

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s