Americans For Fair Taxation is a private, non-profit research and advocacy group that assembled a group of American economists to work on a federal tax code that would be “simpler,” “fairer,” and “more progressive” than before. The objective of the team was to design a new tax system that would be “revenue-neutral” and capable of truly unleashing the potential of the economy. The new tax system was also meant to help in the ““new wealth creation for every working American.” The result was the H.R. 25: The Fair Tax Act of 2007 (Executive Summary).
The Fair Tax Act of 2007 is today a proposal with the Congress. As of the last day of the year 2008, the Act is meant to repeal both income taxes as well as payroll taxes. According to the proposal, no individual’s income will be taxed after the implementation of the new Act. “Capital gains taxes” in addition to the “alternative minimum tax” would also be repealed. The Act includes payroll taxes of individuals as well as employers. Medicare, federal unemployment taxes, and Social Security, would similarly be repealed when they are a part of the payroll taxes. The Fair Tax Act of 2007 further mentions corporate income taxes, gift and estate taxes, and the self-employment taxes to be repealed, thereby making it easier for Americans to enjoy their earnings and their wealth without paying the price of prosperity in taxes (The Fair Tax Act of 2007).
The Fair Tax has been proposed as a replacement for the above mentioned taxes as of January 1, 2009. The new tax is actually explained as a “national retail sales tax on all goods and services sold at retail.” The fact that it is still a tax for the government to generate revenues through it, the new tax is meant to be “revenue-neutral,” which suggests that the new tax would have to be set at a level that is necessary to generate government revenues the present sources of which would have to be replaced through it (The Fair Tax).
The new tax would act as a 23 percent sales tax on all goods and services bought through retailers for personal consumption. The exports of the United States will not be taxed on the principles of the Fair Tax. Similarly, business purchases of inputs are not to be taxed with the Fair Tax. Other items exempted include used or old goods, investments, savings, plus education expenses including tuition fees (The Fair Tax).
Another feature of the new tax system is that every consumer of new goods and services would be informed about the federal taxes that he or she is paying, by way of a sales receipt that would clearly state the actual amount of the Fair Tax. Furthermore, the rate of the Fair Tax would be constant, regardless of the amount spent (The Fair Tax). Additional characteristics of the proposed Fair Tax have been described thus by the Americans For Fair Taxation:
The Fair Tax provides every American family with a rebate of the sales tax on spending up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The rebate is paid monthly in advance. It allows a family of four to spend $27,380 tax free each year. The rebate for a married couple with two children is $525 per month ($6,297 annually). Therefore, no family pays federal sales tax on essential goods and services and middle-class families are effectively exempted on a large part of their annual spending. Funding for Social Security and Medicare benefits remains the same. The Social Security and Medicare trust funds receive the same amount of money as they do under current law. The source of the trust fund revenue is a dedicated portion of sales tax revenue instead of payroll tax revenue. States can elect to collect the federal sales tax on behalf of the federal government in exchange for a fee of one-quarter of one percent of gross collections. Retail businesses collecting the tax also get the same administrative fee. Strong taxpayer rights provisions are incorporated into the Act. The burden of persuasion in disputes is on the government. A strong, independent problem resolution office is created. Taxpayers are entitled to professional fees in disputes unless the government establishes that its position was substantially justified (The Fair Tax).
The new tax system is not only meant to benefit the consumer, but also the economy as a whole. 89 percent of the employers in the United States are small business owners, five million in number. The current tax system is said to be a burden on them. Although many small businesses are exempted from the corporate income tax, small business owners are heavily burdened by the individual income taxes that their business earnings are subjected to. By repealing the individual income taxes, the United States could encourage an increase in small businesses. Moreover, the moneys that were originally paid the government as individual income taxes, may be used by small business owners in the creation of better products and services, provided that the Fair Tax Act of 2007 is accepted (The Impact of the Fair Tax on Small Business).
By leaving more money for investment in the hands of the small business, the Fair Tax would not only improve the revenue position of business, but would also lead to long term economic benefits to follow. Dale Jorgenson, an economist from the Harvard University has stated that the Fair Tax would have an “immediate and powerful impact on the level of economic activity.” What is more, the GDP of the country is expected to increase by 10.5 percent during the first year of the implementation of the Fair Tax Act. Another economist from Boston University, Laurence Kotlikoff, has predicted that the implementation of the tax reforms in the name of the Fair Tax, would raise the capital stock of the economy by 42 percent. The labor supply of the country is expected to increase by 4 percent, while the output of the United States is predicted to increase by almost 12 percent. The real wage rate of the nation would similarly be affected. As a matter of fact, the Fair Tax is expected to increase the rate by 8 percent. Moreover, the economist from Boston University believes that the proposed tax system would lower real interest rates probably “by more than one quarter” (The Impact).
The Fair Tax Act is definitely meant to help the economy of the United States. After all, it has been introduced as an Act to “promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.” Still, the Act is in its first stage of the legislative process. In this stage, the introduced bill would be sent to committees to analyze, investigate, as well as revise, before the Act is sent onward for debates. It has been reported that most of the bills do not pass through the committees that are meant to analyze, investigate and revise them for the next step in the legislative process (H. R. 25). Hence, the future of the Fair Tax is yet uncertain.
Claire Wolfe and Aaron Zelman write that the future of the proposed tax system is also uncertain because the amount of sales taxes that would become payable with the tax reforms are quite unbearable even to imagine. 23 percent in sales tax is a great deal to pay. What is more, the government might never agree to this amount, seeing as this amount does not even cover the present government spending. The Joint Committee on Taxation of the U.S. Congress scored the proposed Fair Tax Act several years back when it was estimated that the government would actually have to charge 36 percent in sales tax to cover the federal expenses and also create revenues. 23 percent in sales tax is nearly not enough from the government’s perspective.
Eventually the government might even decide to put a 57 percent tax on retails using the Fair Tax system.
Wolfe and Zelman also point out that the effects of inflation would be horrendous if in fact the Fair Tax Act of 2007 is ultimately implemented. The authors explain the effects of inflation with an example: a house that costs $260,000 will actually cost $78,000 more with a 23 percent Fair Tax. If, however, the economy experiences “double digit inflation” during this period, the price of the house would become $312,000 with a 23 percent Fair Tax of $93,600. Mortgage interest would also increase during the same period, thus exacerbating the effects of inflation.
The United States has been experiencing inflation in recent years. The worst problem facing the economy at present, however, is the increasing budget deficit. Apparently, the United States is spending more on imports than it is earning through its exports. While the Fair Tax could reduce consumer spending across the nation by increasing the prices of the goods and services sold through retailers, the threat of inflation does not disappear with the implementation of the Fair Tax Act of 2007. Rather, inflation may increase across the nation because goods and services would be sold at a higher price in any case. The sales tax or the new Fair Tax would increase the prices of new goods and services throughout the country. At the same time, Americans would not be able to resist purchasing necessary goods despite the fact that the same goods would be sold with the Fair Tax at a fairly higher price.
Another potential negative effect of the Fair Tax is that it would make it more expensive for retirees to enjoy their golden years. Although Americans For Fair Taxation states that the new tax would enable “retirees to keep their entire pension,” it does not mention the fact that the Fair
Tax would fail to improve the living standards of the retirees (“About the Fair Tax”). In point of fact, retirees who have planned for their retirement with nearly perfect numerical figures to take them through the remainder of life, would find that the Fair Tax is rather unfair because it increases the price of everything for them. Many of the retirees have already paid approximately ¼ or 1/3 of their incomes in taxes for forty years or so. With the remainder that they have left, it would be quite difficult to pay the Fair Tax (Wolfe and Zelman). Hence, the Fair Tax would certainly displease the retirees rather than helping them financially.
The proponents of the Fair Tax system claim that retailers would be obliged to cut the prices of new goods and services when and if the Fair Tax Act of 2007 is implemented. Unless the prices of goods and services are curtailed, Americans might find it rather difficult to maintain their current standards of living with the Fair Tax making it more expensive for them to purchase new goods and services. Wolfe and Zelman also write that the implementation of the proposed tax reforms might open up an immense black market across the United States. People who are unable to afford new goods and services with the increased sales tax, would most likely turn to black markets to enjoy their previous standard of living. Indeed, this is another possible negative effect of the Fair Tax that the government would have to discuss before the Fair Tax Act of 2007 could get beyond the committees that are responsible for at least analyzing the proposed tax reforms.
The Fair Tax is said to be fair only as far as it is a tax with a rate that is uniform for every U.S. consumer, rich or poor. While the rich would have to pay increased taxes only when they increase their purchases of new goods and services, the poor would only be required to pay an increased amount of money for the new goods and services they already purchase. Opponents of the Fair Tax argue that the poor are likely to get even poorer under the new tax code. Other economists have further mentioned that the effect of the Fair Tax system would be negative on the economy as a whole (Wolfe and Zelman). Nevertheless, it is possible that the Fair Tax code would be able to rescue the economy of the United States from its ever problematic budget deficit. Even if the new tax system has a negative effect on the general living standards across the country, it is very likely to reduce consumer spending, which in turn would help to balance the current account of the United States. As a matter of fact, it is necessary for the U.S. to deal with its budget deficit problem before it becomes bigger than before. The Fair Tax Act of 2007 may serve as a blessing for that reason. After checking the increase in the budget deficit, the new tax system may be expected to return the U.S. economy to a healthy state in the years to come.
- “About the Fair Tax”. Fair Tax (2007). Available at www.fairtax.org. (22 April 2007).
- “Executive Summary: The Fair Tax.” Fair Tax (2007). Available at www.fairtax.org. (22 April 2007).
- “H.R. 25: Far Tax Act of 2007.” Track (2007). Available at http://www.govtrack.us/congress/bill.xpd?bill=h110-25. (22 April 2007).
- “The Fair Tax Act of 2007 – HR 25/S 1025.” Fair Tax (2007). Available at www.fairtax.org. (22 April 2007).
- “The Impact of the Fair Tax on Small Business.” Fair Tax (2007). Available at www.fairtax.org. (22 April 2007).
- Wolfe, Claire, and Aaron Zelman. “The Fair Tax: A Trojan Horse for America?” Jews for the Preservation of Firearms Ownership, Inc. (2004). Available at http://www.jpfo.org/fairtax.htm. (22 April 2007).