8 Myths About the Fairtax

Originally posted February 4, 2009

I am a strong conservative who believes that we should have simpler, fairer, flatter taxes. When you have a tax code with more than a million words and more than 500 changes a year, anything would be better.

However, when it comes to the so-called Fairtax, it’s important to be able to cut through the hype and understand exactly what we are talking about. Therefore, I would like to address some of the myths of the Fairtax. This post is for people familiar with with the Fairtax. They are as follows:

1. The Fairtax will get rid of tax filing. This isn’t really true. Taxes will still need to be collected. Instead of every individual and business filing an annual income tax return, the entire reporting and paying burden will be shifted to the retail and service industry. These industries will have to file most likely once a month. In addition, if embedded taxes are all removed, then the Fairtax will only be charged on the end users. Businesses will have to deal with the complexity of resale versus wholesale, exempt sales, mixed contracts, and other such things.

2. The Fairtax will get the government out of our personal lives. The most likely version of the Fairtax involves a monthly “pre-bate” per family, but you know that Bill Gates and his wife are not going to get the same pre-bate as Joe Sixpack and his wife and 10 kids in their mobile home. How will the government know who has a bigger family, or perhaps an income more deserving of a larger pre-bate? Maybe they can file that information with the government once a year.

3. The Fairtax will get rid of the IRS. This is of course the most appealing myth about the Fairtax. If you don’t have to file taxes annually, the IRS will no longer be needed. But now companies are filing once a month. Unfortunately as long as you have a system where you are taking money from one group or segment of society to fund the needs or wants of another, you will have to have enforcement. You will have to have some sort of regulatory group making sure that businesses are filing their monthly returns, including all of their income, not taking cash payments under the table, etc. I suppose we could name that agency something else, but in the end it’s still the IRS.

4. The Fairtax will make sure that illegal aliens and other underground economies pay taxes. Not if you pay with cash. The Fairtax won’t sink a single underground operation, just change the way they do business and avoid taxes.

5. The Fairtax will not increase consumer prices because embedded taxes are taken out. That’s true that it will decrease prices when you take out embedded taxes, but the Fairtax is revenue neutral. So unless you get a pay cut, your share of the federal taxes are not going to be taken out of the price of goods. Not even considering death taxes, your income tax and your portion of payroll taxes account for 63% of government tax revenues. So in the end prices will go up, but only by about 15%. Now, we will all have our whole paycheck and won’t have to pay our portion of income and payroll taxes. That’s real good for anyone who is paying a huge portion of those taxes right now, but for those with minimal or no income, this is a hefty tax increase.

6. With the Fairtax, you are only taxed on what you spend. Again, it’s true. But the myth is that you aren’t taxed on what you save. What do you do with your savings? Eventually, you spend them. And when you do, you are taxed on them. In fact, you are taxed on your savings and what you have earned on the savings. This is effectively an 8% increase in the maximum capital gain’s rate. So the idea that you can decrease your taxes by not spending your money is incorrect, you can only defer your taxes. Knowing our government, when you finally spend your savings the rate will probably be higher than 23%.

7. Retirees get to keep their entire paycheck. Here’s the problem, many people have begun saving with Roth IRAs and Roth 401k plans. These plans are not tax deferred, but are contributed to after tax. The promise of the Roth retirement plan is that when you take the money out, it and it’s earnings are tax-free. If we switch to a Fairtax then when you take the already taxed money out and spend it, that money will be taxed twice.

8. Consumption will increase by 2.4% in the first year and even more in later years. This is based on you getting your entire paycheck, but as noted in point 5 it does not take into account that the Fairtax is revenue neutral and prices will increase by 15%.


1 Response to “8 Myths About the Fairtax”

  1. 1 Yes, he can? « White House 2012 Trackback on October 13, 2011 at 7:05 pm

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