The Fair Tax – How Does It Work? #oktcot #tcot #fairtax #teaparty #fb

Abolish the IRS
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This section which explains how the Fair Tax operates is short, in essence, because the tax system is so simple.  This section concludes by demonstrating how the tax will work in the context of a couple with two children.

First, it is important to understand that under the Fair Tax several taxes will be repealed including the individual income tax, the alternative minimum tax, corporate and business income taxes, capital gains taxes, social security taxes, Medicare taxes, the self-employment tax, estate taxes, and gift taxes.[1] Instead, a 23 percent consumption tax on new items will be imposed at the retail level.  The consumption tax will not be imposed upon used or pre-owned items.  H. R. 25 uses 23 percent because that is the amount necessary to cover all current federal expenditures.   The beauty of the Fair Tax is that the 23 percent rate imposed in H.R. 25 can be lowered if spending cuts are made.

The consumption tax is collected by businesses dealing with taxable goods and services and remitted to the state governments, who will in turn pass the tax to the federal government.  Recall that purveyors of used items, like cars, would not collect the tax because used cars are not covered.  For collecting the tax, businesses and the states will receive one quarter of one percent of what they collect to cover the costs.

Finally, because it is important that everyone be treated fairly, including low income families, every family in America, no matter their level of income, will receive a prebate[2] check to cover the cost of taxes on the basic necessities of life.[3] Each head of household will receive this prebate every month to reimburse them for the sales tax they pay on all spending up to the federal poverty level.[4] The amount of the prebate will be determined by the government’s published poverty levels for various sized households.  To receive the prebate, the head of household will submit a list of those in the house along with their social security numbers to be placed in a database.  A person spending at the poverty level has a 0 percent effective tax rate while someone spending at twice the poverty level would have an effective tax rate of 11.5 percent.[5]

Using a couple with two children as an example, I’ll demonstrate exactly how the Fair Tax will work.  If they spend $45 on groceries a week under the current income tax system then when all of the embedded taxes are removed the price of those groceries will be lessened by around 22 percent to $35.10.  When the Fair Tax is added, the price of those groceries will be $45.58, which is only 58 cents more than they were paying.[6] However, under the Fair Tax this family will receive their entire paycheck back.  If the employers fail to take taxes out of price, the addition of formerly-withheld income taxes and payroll taxes to their paycheck will give them a 25 percent to 30 percent increase in take home pay.[7] The poverty level in 2009 for a family of four is set at $29,140[8] and the family will receive a prebate of $6,702 to be paid in twelve installments.[9]


[1] Boortz, p. 75

[2] An advance rebate

[3] Boortz, p. 79

[4] Boortz, p. 80

[5] Americans For Fair Taxation, http://www.fairtax.org, Karen Walby, Ph.D., February 16, 2009.

[6] Boortz, p. 84

[7] Boortz, p. 84

[8] Federal Register, Vol. 74 No. 14, January 23, 2009, pp. 4199-4201.

[9] Federal Register, Vol. 74 No. 14, January 23, 2009, pp. 4199-4201.

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5 Reasons the American Tax Payer Should Support the Fair Tax! pt 5 – The Underground Economy and Tax Cheaters #tcot #oktcot #fb

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The Underground Economy and Tax Cheaters

A great Oklahoman once said, “The income tax has made more liars out of the American people than golf has.”[1] Tax evasion exists when a person willfully and fraudulently conceals income so as to not pay a tax on it.  To stop all tax evasion under the income tax system would be as optimal as hiring a police officer to stand on every street corner to prevent jaywalking.[2] The cost outweighs the benefit.

The shadow economy, legal income-producing activities that are not reported to tax authorities,[3] represents roughly 10 percent of GDP according to a 2000 survey.[4] The “tax gap,” as the IRS calls it, was $345 billion in 2005.  The underground economy, which consists of illegal activities performed by drug dealers and prostitutes, was estimated at 9.4 percent of GDP in 1994.

A consumption tax will not stop the underground economy from existing but the evaders will, unlike before, have to pay the tax whenever they purchase a double cheeseburger and fries.  There lies the benefit for the honest taxpayer.  Under the income tax system, the government doesn’t take the hit when crooks find ways to not pay the tax.  Instead, the government increases the tax on those already paying it to make up the difference.  Under a consumption tax, that will not be necessary and the dishonest will have to pay as much as the honest.


[1] Will Rogers

[2] Slemrod, p. 45

[3] Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic Literature, 38 (March 2000), pp. 77-114

[4] Boortz, p. 93

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Shaking Up the System Instead of Shaking Down the People

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Ask anyone who has ever been mugged or burglarized and they will tell you that the experience wasn’t pleasant.  Ask anyone that was cheated out of their savings by Bernie Madoff and they will tell you that his serving time in prison is not as satisfying as getting their money back.  What if I told you that you were the victim of a ponzi scheme and that every April 15th your wallet was being pick-pocketed?  If you are a taxpaying citizen, then you probably are.

The first part of this article addresses the problems imposed by the current tax system, an unstable currency, and government program in the red.  The primary purpose of these reforms is to give Americans more control of their finances and provide more security for dollars invested.

A. ESTABLISH A TAX THAT IS FAIR

President Kennedy once stated that “Our present tax system…exerts too heavy a drag on growth…it reduces the financial incentives for personal effort, investment, and risk-taking…the present tax load…distorts economic judgments and channels an undue amount of energy into efforts to avoid tax liabilities.”[1] At the time of his statement, Kennedy did not know that an efficient, growth-encouraging system called the Fair Tax would present a real possibility for America to abolish the IRS and its punishing tax code in just half a century.

When the United States was born, the federal government raised much of its revenue through taxation of a few items such as alcohol and tobacco.[2] During times of war, additional taxes were levied to cover the costs.[3] It was understood that those taxes would disappear afterwards because most governing in times of peace was expected to be done at the state and local level.

In 1894, politicians in Washington introduced a bill entitled “An Act to reduce taxation, to provide revenue for the government, and for other purposes.”[4] This act created a 2 percent tax on everyone with an income greater than $4,000 a year.[5] Additionally, government officials were exempt from the tax.[6] President Grover Cleveland believed the law was unconstitutional and let it become law but did not sign onto it.[7]

The United States Supreme Court in Pollock v. Farmers’ Loan & Trust Co. heard a case about the Constitutionality of the newly imposed income tax and decided that it was in violation Article 1, Section 9 of the Constitution.[8] Farmers’ Loan & Trust Co., in compliance with the act, announced that they would be providing the names of all of those liable under the act to the Department of the Treasury.[9] Charles Pollock, owner of 10 shares of Farmers stock, sued to enjoin the company from paying the tax.[10]

The Court held that a number of the taxes in the act were direct taxes.  As such, the tax imposed on the incomes of real estate and of personal property is a direct tax and is therefore unconstitutional and void because it is not apportioned according to representation.[11] All of those sections, constituting one entire scheme of taxation, are necessarily invalid.[12]

Undeterred, Congress decided to amend the Constitution.  The amendment passed in both the House and the Senate and then three-fourths of the states ratified the Sixteenth Amendment, making it law on February 12, 1913.  Today, nearly two-thirds of income tax revenue comes from the top ten percent of wage earners and 52 percent of wage earners pay nearly 100 percent of all personal income taxes collected by the Internal Revenue Service.[13] To the 52 percent of Americans shouldering the burden of government spending, this does not seem like a very fair tax.


[1] President John F. Kennedy, November 20, 1962

[2]James Hines Jr., “Taxing Consumption and Other Sins,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 51

[3] Hines, p. 52

[4] Charles Dunbar, “The New Income Tax,” The Quarterly Journal of Economics, Vol. 9, No. 1 (Oct., 1894), p. 26

[5] Dunbar, p. 31

[6]Edwin R. A. Seligman, “The American Income Tax,” The Economic Journal, Vol. 4, No. 16 (Dec., 1894), p. 644

[7]Gerald G. Eggert, “Richard Olney and the Income Tax Cases,” The Mississippi Valley Historical Review, Vol. 48, No. 1 (Jun., 1961), p. 25

[8] Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895)

[9] Pollock, 157 U.S. at 430

[10] Id.

[11] Id., at 434

[12] Id.

[13] Michael Graetz, “Tax Reform Unraveling,” The Journal of Economic Perspectives, Vol. 21, No. 1 (Winter, 2007), p. 81; Neal Boortz & John Linder, The Fair Tax Book. (New York: Harper Collins Publishers, 2005) p. 16

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Defeating the Second American Crisis

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A Plan of Action for the Prosperity of America

During an American Revolutionary War, Thomas Paine inspired his fellow countrymen to not quit when things were tough and to fight for freedom.  During this economic crisis of the Twenty-First Century, this author hopes to inspire the reader to support a restoration of Constitutional principles and the implementation of a tax system which encourages growth and is compatible with the concepts of fundamental fairness and equality.

One of the most famous pamphlets produced during the era of our nation’s founding was entitled Common Sense.  That great work explained in simple fashion the importance of American Independence.  Thomas Payne wrote another series of articles throughout the course of the American Revolutionary War entitled The American Crisis.  In these articles, Payne encouraged his fellow countrymen to not give up in light of the crisis they were facing.  The first paragraph of the first article put it best:

THESE are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives everything its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as FREEDOM should not be highly rated.

America is once again at a crisis point.  Though the first crisis was resolved and secured us our sovereignty, this second crisis threatens to destroy the economic freedoms of America.  Congress recently raised the national debt ceiling to a shocking $14.3 trillion with no signs of slowed federal spending.  Representatives pass spending bills bloated with pork and special favors to benefit the few at the expense of the many.  The dollar is swiftly losing value.  The 9.7 percent unemployment is the lowest in five months but this figure does not include those who gave up searching for a job or who are no longer allowed to claim unemployment benefits.

During this Second American Crisis, this author hopes to inspire support for a restoration of Constitutional principles in our government and the implementation of a system which encourages growth that is compatible with the concepts of fundamental fairness and equality.

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