The Fair Tax is a single-rate federal sales tax. The tax would be added to the price of new goods (not used) and services upon purchase. All U.S. residents would receive a monthly payment from the government equal to the amount of tax that would have been paid for essential goods and services at the poverty level. The tax would eliminate individual, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.
Sounds great, but what’s the rate? The proposed rate is the rate that would be needed to roughly generate the tax revenues that would be lost by the elimination of all the taxes mentioned above. Some sources will tell you that rate is 23%. Some sources will tell you 30%. It depends on how you look at it. Let me explain:
- Suppose you want to purchase a $100 widget. That seller clearly wants $100 because that’s the price, but the 23% Fair Tax has now become law. What’s the seller going to charge you now - $77 ($100-$23), and eat the taxes for you? I think not. The seller still wants his money and wants to pass the new 23% tax on to you, so the seller is going to have to charge you $130 (because 23% of $130 = $30 worth of tax) in order to get his $100. See why mischievous proponents of the Fair Tax say 23% and misleading opponents of the Fair Tax say 30%?
What about the cons of a Fair Tax system? As recently as 2009, more than half of American households paid no income tax, so would it be good for those households to start paying taxes now? 23%/30% is also a fairly hefty tax rate for most people to swallow, and it might be just enough to deter some from buying goods and services. Can you imagine how it would feel for everything to cost 23%/30% more over night? What would that even do to our economy? A Fair Tax system might also spawn more underground markets as our friend, the seller, would have the incentive to illegally sell that pre-Fair Tax $100 widget to you for $105, keep the change, and never report the sale or remit the taxes to the government.
So what do you think? Is the Fair Tax fair?
What I think is that the current tax system is broken. Any system’s code that is longer than War and Peace, any system that is so confusing and painful that people are willing to pay premiums to accountants to save them from having to think about it, and any system that has become so polluted by the work of lobbyists and special interest groups can be improved. On one hand, the Fair Tax seems fair if it effectively replaces all current tax revenue by taxing everyone the same way, at the same rate, and reimburses people for the essentials. On the other hand, taxing more than half of a population that is currently untaxed, taxing a majority of people at an effective tax rate much higher than they are used to, and raising prices on everyone at once doesn’t seem so equitable.
I think the Fair Tax could be fair and could work. I just don’t currently see how the U.S. could smoothly convert to a Fair Tax system, or quite frankly, how a majority of Americans would ever be in support of the Fair Tax system. What do you think?