Bentzen’s Blog

Time for a Fair Tax
by Brian Bentzen 

The Fair Tax is a proposed change in tax law that would completely eliminate the federal income tax, replacing it with a progressive national sales tax. I think this is the single most important economic bill of our time.  It promises to alter the distribution of tax away from the poor, who in many cases pay a disproportionate tax due to FICA and payroll tax withholdings.  It promises to keep American corporations in America and direct foreign investments to the US by rewarding US companies for staying on US soil.  It reduces government spending on tax collection and saves you time and stress since you would never need to file another federal tax form.  It works with the state sales tax system already present in the vast majority of states.  And in the end, it encourages financial strategies that will help Americans help themselves.

Why is change a good thing?

Our current tax system is archaic, over 60,000 pages long and requires a specialized industry to help prepare taxes. Additionally, 83% of large corporations (who pay a large percentage of the taxes) have overseas subsidiaries located in tax havens, allowing them to avoid a portion of the tax they arguably owe the government.  The American people waste an incredible sum of money ($11 billion in 2007) just to pay their tax collectors.  The sum spent on tax preparation at H&R Block in 2007 was $2.686 billion according to H&R Block’s 2007 Annual Report, and they have about a 50% market share according to a quick google search.   This means that our current “good thing” is costing the American people on the order of $16 Billion a year.  Our current taxes are not as progressive as you have been led to believe.  Although generally speaking, high income earners pay much more than low income earners, the FICA and payroll taxes add up 15.3%.  These taxes are in addition to income taxes.  If you are making minimum wage you still pay these taxes, but income tax on the money you earn, increasing your tax rate from what you may believe to be low or even 0%.  Consider the unemployed, independently wealthy individual who earns only capital gains and dividend income.  This person pays 15%, less than his housekeeper, chauffer, nanny, gardener, etc.  

How would Fair Tax affect me?

I don’t think anyone knows the exact answer to this question.  Prices should remain fairly stable, even with the added sales tax, because the tax that corporations are paying now will just be payed at the cash register by you.  This is not, however, a change from current practice.  You are already paying the corporate tax every day at the cash register.  The overall effect should be a decrease in the amount of tax every individual pays over the course of their lifetime.  The reason for this is predicted economic growth and decreasing tax fraud by forcing everyone to pay tax, including tourists, criminals and illegal aliens.  

Unburden the Poor

You would not be completely free of paperwork.  You would still need to submit a Family Consumption Allowance (FCA) form.  This form is the key difference between a flat tax and the fair tax.  The FCA would refund the tax up to the poverty level for all families.  Families living under the poverty level would thus pay no taxes, while the richest people would pay closer the full tax rate.  Those who did not submit the form would pay the full tax rate without a refund.  

The Family Consumption Allowance is $10,400 per adult and $3,600 per child.  The annual rebate is $2,392 per adult and $828 per child.  This rebate would be applied monthly, with a direct payment to your bank account.  For the poor, this is effectively a 100% tax rebate.  For those who spend millions, this refund is just a drop in the bucket.  

An Investment in American Business

The Fair Tax removes the tax burden from corporations, who normally pass that burden on the consumer.  The US charges the world’s highest corporate tax.  Businesses move overseas for one reason, higher profit margins.  Reducing corporate taxes would reward companies who stay on American soil, and encourage overseas investors to come to America to start their businesses.  American products would become more competetively priced compared to imports due to tax advantage.

Encourage Savings

Gone are the days of IRAs and 401k’s.  These institutions exist only as a way to delay taxation.  The Fair Tax eliminates this taxation altogether, and encourages people to save now and buy later.  Additionally, this law will decrease the incentive to overspend on credit, by taxing the overspending at the time of purchase.  If you make $50,000 a year, you will take home $50,000 and you can do whatever you want with it.  If you spend all or most of it, like most people will, you’ll pay tax on all or most of it.  If you only spend up to the poverty level, you’ll pay essentially no tax.

Effective Tax Rate

The Fair Tax is a 30% exclusive tax or a 23% inclusive tax.  This means that if you currently make $100,000 you pay a 23% inclusive tax and take home $77,000.  Under the Fair Tax, you take home $100,000 and pay the same $23,000 tax (30%) at the cash register.  The tax you pay is the same under both systems, but under this system, your thrift, savings and financial planning is rewarded.

More Information

FairTax.org is an encyclopedic volume all about the Fair Tax proposal.  Wikipedia provides an excellent summary as well.  There will be more to come on this subject.  I’ll answer any questions and try to convince you this is the best option for America.