Introduction
Switching the United States’ current income tax system would benefit the country as a whole. Therefore, variations of the flat tax that are proposed, some of which set a percentage on income while others set a percentage on sales tax. Those arguing in favour of such tax reforms contend that it will eliminate the complexity of our current system and the loopholes. This will contribute towards boosting of the economy. One such proposal, on which a number of books have been written, is called Fairtax. This is a flat rate sales tax only on new items. For example, if someone were to buy a used car, they would not have to pay taxes all over again. This is because the taxes had already been paid when that vehicle was bought new. This approach will put more money in people’s pockets because they would not be paying the taxes out of their paychecks thus there will be more money that they can spend into the United States economy. Also, it will make it possible for illegal or uncirculated money to become accountable. This will happen because the proposed law taxes the sales, and so, when that money is spent, it is taxed.
The stakeholders involved in this would be many different interest groups and organizations that have their own bill that they are trying to pass. This difference of opinion has allowed many variations of the flat tax to be created. The discussion also revolves around large businesses and the rich because they’ll be taxed equally as an average citizen. Also, we should be mindful of the fact that politicians of different shades – democrats and republicans – will have their own opinion about it. Sometimes, the political actors lean more towards a reform on the current income tax system.
Therefore, by eliminating the United States income tax system and replacing it with a flat tax, it will ensure that every citizen is paying taxes. Thus, it will eliminate loopholes, cut costs by downsizing or eliminating IRS, and boost the economy through business and individual’s pocket.
Background
If we evaluate the estimated tax gap, which is the amount of money the Internal Revenue Service is unable to collect due to misfiling and tax cheaters; it is comes out to be around $600 billion. This uncollected money leads to increase in tax rates and increases the burden on honest tax-payers. Therefore, this leads to dissatisfaction about our current taxation system.
This lack of satisfaction with the current income tax system has generated serious interest in the FairTax system. The latter is expected to replace almost all of the federal tax with a national retail sales tax. It is being considered to be a progressive, however; there is considerable skepticism around it. At the same time, the global measures of progressiveness suggest that the current system is progressive, and the FairTax would be regressive. Therefore, our research looks into every aspect with an eye on the objectivity.
Methodology
Also, newspaper articles also contributed a little, but they were not a major source of my research because most of the sources I could research directly in this topic. The methodology of the research was to go directly to the sources, like the interest group’s website, IRS and politicians’ website and books. Next, I researched scholarly reports and articles through the university’s campus library and Google Scholar. My last point was the newspaper articles and blogs so that I could see what other people were saying and utilized that information in support of the facts.
Overall, this subject will provide valuable research to the political community because I have not focused research on just on proposal. I tried to incorporate all proposals and outlined the benefits of a flat tax over our current income tax system. The research paper will also highlight the economic benefits that a flat tax has while eliminating the complexity of the code, lower government spending by reducing or eliminating the IRS, and getting rid of loopholes that primarily benefit the rich. Researching this topic should be fun because there is much valuable information within the different proposals and politicians’ websites.
Analysis
There is a strong support among lawmakers in favour of the FairTax. Rob Woodall, the member of U.S. House of Representatives, holds the opinion that the complete overhaul of the nation’s 67,000 page tax-code should be replaced with a 23% consumption tax. This tax would be applied on the purchase of goods and services, collected upon the completion of the sale. He believes, under this law, individuals will be able to choose when they pay taxes, and how they pay them. This outcome, he believes, will be made possible by the fact that whole process will become simpler and more transparent. In this context, he brings into focus the fact that most people don’t realize the cost of the government; the amount of tax payers’ money spent on running the government. He dismisses the notion that this will burden the poor and benefit the rich; as this approach taxes the people in proportion of how much they consume. So, the more you spend, the more you are taxed.
Further, he believes that the cost of ensuring tax compliance compared to the amount of tax collected because of it is a reason big enough for not spending on it. In his support, the quotes a research by the Tax Foundation where the projected compliance cost in 2011 was expected to be $391.9 billion, which was 20% more than the total federal revenue. This data highlights the huge cost of compliance of 67,000 page code book that Americans have to bear. The significance of the number of pages lays its complexity, which increases the chances of error, and costs associated with the subsequent corrections. Even otherwise, compliance to such volume of regulations requires a sizable amount of bureaucracies, and its associated costs. Talking about non-tangibles, such volumes make it difficult for policy makers to grapple with the amount of work, if reforms are needed. To aid in that, there would be a need for a whole cohort of analysts and experts to come to the aid of policy makers. Upon taking all these costs involved into account, one is prompted to think if all this really worth the tax payers’ money?
Even prior to this, Senator Chambliss had introduced the Fair Tax Act in 2003. In his opinion, the bill will bring about the concept of “freedom, fairness, and economic opportunity by repealing the income and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax.” He believes the current tax structure, which was first implemented in 1913, is very complicated, and there is in need for a major overhaul. Therefore, we can infer that any structure, which is overly complicated, is bound to have loopholes. Also, it is not hard to imagine that those inclined to make use of them would be very hard to catch. The task of regulators is always reactionary, those finding looping will always be a step ahead. Therefore, it is pertinent that drastic measures are taken to simply the tax structure.
The Fair Tax Act of 2003 is expected to be the replacement of “individual income tax, the corporate income tax, capital gains tax, all payroll taxes, the self-employment tax, and the estate and gift tax.” In return, it is supposed to impose 23% tax on the final sale of all goods and services. Also, this bill is expected to provide tax relief on business to business transactions such as those products that have already been taxed and are not subject to sales tax. This way it will avoid double taxation. Another positive point of this bill is that the social security and the Medicare benefits will remain unaffected. Finally, under this bill every American will receive a rebate check for an amount equal to the federal poverty level, which will go towards their spending on the necessities.
Further, unlike the traditional income tax, fair tax will apply to every American consumer equally. This tax would include those who report incorrect income or take advantage of the loopholes. So, under this system the tax base will expand exponentially to include “illegal immigrants, drug dealers, gamblers, prostitutes, and wealthy” because they all buy goods and services. So, almost all will pay at most 23% tax on the things they purchase as against 30% on money most, not all, earn. It is estimated that the new tax system will collect the same amount of revenues, and at the same time spread the burden more evenly. The major difference lies in the fact that it taxes the consumptions than the earnings, which ensures that everybody who consumes also contributes to the economy. The opponents will argue that it may lower the consumer spending, and be detrimental to the economy. I would argue that those who have to spend will do so. To the extent that people will have more money to spend under the new policy. This law will promote consumer spending and stimulate the economy. This broader tax base will also include the forty million tourists who visit America every year. And the like the taxation system, the education costs are not included. This approach means all the costs towards the school and university education is considered to be pre-tax income.
Elaborating further on the taxation data itself, the 23% tax is collected on the retail of all the goods and services at the time of purchase itself. And will be calculated the same way as the current income tax, which is inclusive of what you are charged. Therefore, the inclusive FairTax rate of 23% makes it rather easy to compare it with the current income tax.
Further, it is postulated that the present suggested taxation rate of 23% might increase to 30% over the course of time. That is because the society is gradually aging and there is a need to pay for their health and pension. As mentioned previously, the Fair Tax rebate pays 60% of the increased consumption tax payments of households the rebate is expected to increase from a current the level of 4.7 % to 6.8% of national income by 2100. Therefore, switching to consumption based taxation provides better saving incentives. This law also redistributes resources from the older consumers to those who are younger. Also, it is anticipated that there will be a large and progressive gains arising from the switching to the FairTax. These gains are because of the wealth tax component of the FairTax, as it preserves the social security benefits. Also because of the introduction of highly progressive rebate, elimination of highly progressive income tax, rise in actual wages, and also due to the reduction in the federal disciplinary spending. Also, switching to the FairTax does not involve any reduction in the level of discretionary spending. Also, the welfare effects of the seniors in the low-income category will be substantially changed. Further, the welfare losses in the high-income category are changed by a slight amount.
Therefore, we can say with a certain amount of surety that aging population of the U.S. in conjunction with high and growing old age pension and health care benefits result in much higher payroll direct tax. These expenses have the potential to damage the macro-economy. It is estimated that to cover such expenses, it would require more than doubling of the payroll tax rate. Also, significant amount of short-term capital shortage. All these challenges are expected to reduce the real wages per unit human capital by 8 percent. Against this dismal future, the FairTax offers a viable alternative. Also, according to our calculations, switching to the FairTax “would raise the long-run capital intensity, raising long-run real wages by 25 percent compared to the base case alternative”. Put simply, the FairTax presents a credible opportunity to improve the country’s economic performance and promote the well-being of its citizens.
Opinions have been expressed that the Republican Party is best positioned to implement Fair Tax, as retribution to what they did to the economy. It is being argued that if properly designed the Fair Tax will stand for everything the Republican party stands for; “freedom, limited governance, economic growth, and personal responsibility”. In the context of the recent scandals affecting the IRS, it is unfathomable to imagine that this party won’t stand up for tax legislation. Strong opinion has been expressed that the current set up of IRS prevents it from being reformed. Therefore, it should be completely abolished and be replaced by an entirely new system. And no replacement can be better than the concept of Fair Tax.
Further, it is argued that the implementation of Fair Tax will lead to explosive growth, and will allow the United States to recover the revenue and other resources it lost in the past thirteen years. Therefore, further stressing the point that the Republicans would be best positioned to implement this tax law. Also there is merit in taxing and subsidizing the very same people. Further, the Fair Tax provides for a “prebate”, which involves refunding to each family the Fair tax that they pay if they earned and spent over the poverty income level. Further, though not a part of the current Fair Tax Bill, this Prebate can be used to provide a line a credit to replace all the social security programs. It is projected that this Prebate backed line of credit will allow the federal government to reduce its spending by 4.4% of GDP. And a 15% Fair Tax rate provide the Federal government with enough funds in terms of value. It is postulated that to keep everyone honest and allow the Social Security to be viable, the 6.2% employer share of Social Security income tax should be allowed to continue. This is expected to increase the federal revenues by about 2.0% of GDP. Further, it helps to reduce the short-term deficit that results from the 15.0% FairTax rate.
It is without doubt that the debate in favour of FairTax has a strong political connotation. The former presidential candidate spoke openly in its favour. Views were expressed about complete abolition of current tax codes, and more so about the complex deductibles. However, it is argued that higher tax on necessary purchases will be hurt the poor and needy. The proponents of the Tax contend that this will be offset by the ‘rebate’ sent out to every house hold to cover up for the taxes on their spending up to the poverty level. However, it seems they failed to take into account the bureaucracy built around this itself. How will it be determined whom all spent below the poverty line? How will you track everybody’s expenses? Will they have to file for expense return? And what about the bureaucracy built around mailing out those checks. How will the new law plug the loopholes, which are very new to the system? Let’s not forget that those looking for loopholes are always one step ahead of the system. How will the law take into account those who pay by cash and they show their expenses to be below the poverty level? What about those poor who have to pay for medicines, and consequently their expense goes above the poverty line?
Conclusion
The FairTax is just a different way of collecting taxes, unlike the current system, is a tax on consumption than on the payroll. It is expected that, under this system, the government will collect the same amount of revenues, without the costs and the complexities of the current system. It is not without saying that it is not possible to cheat under the FairTax system, but it will not be possible for a single individual to do so. In addition, to sharing of the burden based on consumption, it will not adversely affect those getting social assistance and Medicare. Further, it will go on to provide greater rebate. However, there are two key questions that remain to be answered regarding getting the rebate. How will the IRS know that a particular family spent less than what a typical poor family does? Will this require creating another bureaucracy to figure that out? Also, say suppose, a poor person happen to fall sick or something, and had no choice but to spend money, will they be disqualified from the rebate checks just because they spend the money? This new loophole will be double whammy for such person. There would be numerous such cases, which will only come to light once the Fair Tax law has already been in place for years. Further, there is a fair likelihood that a new bureaucracy is created to deal with such unexpected situations.
So far, it seems that the new Fair Tax law seems very good on paper. However, it needs to be debated threadbare in both houses of the Congress and in public before it gets any closer to get enacted.
References
Chambliss, S. (2004, 09 23). Chambliss Statement on the Fair Tax Act of 2003. Retrieved from Saxby Chambliss: http://www.chambliss.senate.gov/public/index.cfm/floorstatements?ID=50473060-c04f-730a-03fa-64927a759b56
Donnell, J. R. (2013, 04 08). LETTER TO THE EDITOR: FairTax bill simplifies code. Retrieved from The Washington Times: http://www.washingtontimes.com/news/2013/apr/8/fairtax-bill-simplifies-code/
Hoagland, K. (2010). The FairTax Solution: Financial Justice for All Americans. New York: Sentinel.
Jokisch, S., & Kotlikoff, L. J. (2005). Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax1. The National Bureau of Economic Research.
Kuang, Y., Englebrecht, T., & Gilley, O. W. (2011, 10). A Distributional Analysis of the FairTax Plan: Annual and Lifetime Income Considerations. Southern Economic Journal, 78(2), 358-381.
Regnier, P. (2008, 02 21). Behind Huckabee's radical 'Fair Tax'. Retrieved from CNN Money: http://money.cnn.com/2008/01/05/pf/taxes/fair_tax.moneymag/index.htm
Swanepoel, S. (2011, 07 27). Woodall Credits Public For Fair Tax Hearings. Retrieved from Loganville-Grayon Patch: http://loganville.patch.com/groups/politics-and-elections/p/woodall-credits-public-with-helping-get-fairtax-into-hearings
Viebeck, E. (2012, 04 23). Georgia Republican Woodall would replace income tax with sales tax. Retrieved from The Hill: http://thehill.com/capital-living/new-member-of-the-week/222961-woodall-favors-replacing-income-tax-with-sales-tax
Woodall, R. (2011, 01 24). RobWoodall. Retrieved from Let's Move Forward on Tax Reform: http://woodall.house.gov/editorial/lets-move-forward-tax-reform
Woodhill, L. (2013, 09 18). When The Republicans Get Serious About Leading, They Will Lead With The Fair Tax. Retrieved from Forbes.com: http://www.forbes.com/sites/louiswoodhill/2013/09/18/when-the-republicans-get-serious-about-leading-they-will-lead-with-the-fair-tax/
