"Fairness"
While I do not particularly like the name, Fairtax does indeed have some elements that improve the "fairness" of the tax system. One of the best benefits is that everybody pays, at least anybody that buys stuff. Illegal immigrants, average working stiffs and the super rich all have to pay the sales tax. It doesn't matter how much money you have to blow on expert accountants, everyone will have the same understanding of the tax code. There won't be constant hunting for tax-advantaged investments or savings accounts, because making and saving money isn't taxed anymore, just spending that money.
Tax-advantages are probably one of the most "unfair" parts of the current tax system. Lobbyists petition congress to create special exemptions or alterations for specific industries or causes. Thus you get situations where some businesses must pay more in taxes because they don't have the lobbying assets that other businesses do. A national sales tax removes some of that influence. Obviously congress will still be influenced to spend money in the interest of special groups, but those bills are harder to pass than simply modifying a few sentences in thousands of pages of tax law. This may actually be one of the biggest hurdles to implementing such a plan, congress is never very willing to give up control of anything, let alone the collection of money that they love to spend.
This would also force more transparency from congress. Any adjustments to the tax rate would affect everyone, not just certain segments of the population. As can be seen in the current tax discussion, there is often a desire to raise taxes on the rich as they are a small minority and not always viewed in the best light. Everyone else is more likely to go along with it because their taxes remain unchanged. With a sales tax, everyone will feel it and everyone will know exactly how much everyone else pays. No more tables or brackets, if taxes go up 1%, everyone knows that they will now pay 1% more. Even those under the poverty threshold will still be cognizant of the situation because even though all of their taxes are refunded, they still have to pay them upfront. Hopefully this would lead to more scrutiny of government spending, as everyone would see a direct benefit if spending was lowered enough to reduce the tax rate that everyone would see at the register. Of course, at this point government spending is entirely divorced from tax revenue, so congress would probably just lower the tax rate and increase the rate of the money printer.
This concludes my posts on a national sales tax. There are obviously some things that would still need to be ironed out, but I hope I have at least made the point that this is something worth seriously looking into.
~ Another Guy
Showing posts with label FairTax. Show all posts
Showing posts with label FairTax. Show all posts
Wednesday, December 1, 2010
Monday, November 22, 2010
The Case for a National Sales Tax: Part 3
Potential Economic Benefits
One of the biggest potential impacts that this system could have on American businesses is to make them more competitive in the global market. Removing payroll taxes alone would lower the overall cost of U.S. labor without shrinking workers' wages. And labor costs are routinely mentioned as one of the top reasons for manufacturing moving overseas. However, a system such as FairTax would remove not only payroll taxes, but all other corporate taxes as well. This means that a firm that manufactures widgets in the U.S. would be charged no direct taxes. Domestically, the widgets themselves would only be exposed to taxes at the time of retail sale. If the widgets were exported, there would be no U.S. taxes involved at all (barring some import/export tax) and the economic advantages of moving production overseas begin to look much less attractive. More domestic production would lead to an improved (or ideally eliminated) trade deficit, increased employment opportunities, etc.
It is also worth noting that removal of corporate taxes would most likely cut down on the games played by companies such as the "Double Irish Arrangement" and "Dutch Sandwich". Such structures allow many international firms to avoid much of the U.S.'s 35% corporate income tax. For example, Google manages to only pay 2.4%. Such maneuvers are by no means rare and ensure that firms who only operate domestically or do not have the resources to put into tax avoidance are the only ones paying the full rate. Removal of loopholes associated with complex tax policies would certainly improve financial transparency.
Next up: "Fairness" Benefits
One of the biggest potential impacts that this system could have on American businesses is to make them more competitive in the global market. Removing payroll taxes alone would lower the overall cost of U.S. labor without shrinking workers' wages. And labor costs are routinely mentioned as one of the top reasons for manufacturing moving overseas. However, a system such as FairTax would remove not only payroll taxes, but all other corporate taxes as well. This means that a firm that manufactures widgets in the U.S. would be charged no direct taxes. Domestically, the widgets themselves would only be exposed to taxes at the time of retail sale. If the widgets were exported, there would be no U.S. taxes involved at all (barring some import/export tax) and the economic advantages of moving production overseas begin to look much less attractive. More domestic production would lead to an improved (or ideally eliminated) trade deficit, increased employment opportunities, etc.
It is also worth noting that removal of corporate taxes would most likely cut down on the games played by companies such as the "Double Irish Arrangement" and "Dutch Sandwich". Such structures allow many international firms to avoid much of the U.S.'s 35% corporate income tax. For example, Google manages to only pay 2.4%. Such maneuvers are by no means rare and ensure that firms who only operate domestically or do not have the resources to put into tax avoidance are the only ones paying the full rate. Removal of loopholes associated with complex tax policies would certainly improve financial transparency.
Next up: "Fairness" Benefits
Tuesday, November 16, 2010
The Case for a National Sales Tax: Part 2
The Benefits of a Simplified System
As a commenter pointed out on the last post, it doesn't matter how short a piece of legislation is, the average American (and probably more than a few members of congress) will never read it. That is just fine, we operate in a society filled with laws without ever reading much in the way of detailed legislation. However, according to a survey by the National Retail Foundation, almost 75% of US taxpayers intended to file last year's taxes using an accountant, tax preparation service or software. This would seem to indicate that the process of filing a tax return is either so complicated or cumbersome that a huge number of Americans are willing to pay someone else to make it easier. Don't get me wrong, I understand that many American's are lazy and some would probably pay someone else to go to the bathroom for them if they could. But, the fact that the current tax code is so complicated that a taxpayer preparing his own taxes might easily be missing out on deserved credits and deductions is absurd.
A national sales tax would remove the need to hunt for deductions or credits that change from year to year. In fact, individual taxpayers wouldn't even need to file a return each year. All you would have to do is let the government know that you exist so that you can be mailed your monthly "prebate". Removing the burden of tax returns from citizens also has another benefit: it is hard to dodge taxes. Even an illegal alien working "off the books" would need to purchase things and would so contribute taxes. Obviously there will always be tax cheats no matter what the system and many states deal with businesses circumventing sales taxes, but many simple mistakes that lead to incorrect returns each year can be avoided entirely.
Perhaps the greatest benefit of simplicity is something that seems to be a hot topic at the moment, smaller government. The IRS could be vastly shrunk as the number of tax filings would decrease dramatically. Furthermore, if the federal government paid the existing state agencies that collect local taxes to handle the federal sales tax, even further efficiencies could be achieved. A streamlined system would help to remove at least a thin layer of bureaucracy from an already bloated government. Spending less money on overhead means that less of the tax money collected goes into collecting taxes.
Next up: potential economic benefits
As a commenter pointed out on the last post, it doesn't matter how short a piece of legislation is, the average American (and probably more than a few members of congress) will never read it. That is just fine, we operate in a society filled with laws without ever reading much in the way of detailed legislation. However, according to a survey by the National Retail Foundation, almost 75% of US taxpayers intended to file last year's taxes using an accountant, tax preparation service or software. This would seem to indicate that the process of filing a tax return is either so complicated or cumbersome that a huge number of Americans are willing to pay someone else to make it easier. Don't get me wrong, I understand that many American's are lazy and some would probably pay someone else to go to the bathroom for them if they could. But, the fact that the current tax code is so complicated that a taxpayer preparing his own taxes might easily be missing out on deserved credits and deductions is absurd.
A national sales tax would remove the need to hunt for deductions or credits that change from year to year. In fact, individual taxpayers wouldn't even need to file a return each year. All you would have to do is let the government know that you exist so that you can be mailed your monthly "prebate". Removing the burden of tax returns from citizens also has another benefit: it is hard to dodge taxes. Even an illegal alien working "off the books" would need to purchase things and would so contribute taxes. Obviously there will always be tax cheats no matter what the system and many states deal with businesses circumventing sales taxes, but many simple mistakes that lead to incorrect returns each year can be avoided entirely.
Perhaps the greatest benefit of simplicity is something that seems to be a hot topic at the moment, smaller government. The IRS could be vastly shrunk as the number of tax filings would decrease dramatically. Furthermore, if the federal government paid the existing state agencies that collect local taxes to handle the federal sales tax, even further efficiencies could be achieved. A streamlined system would help to remove at least a thin layer of bureaucracy from an already bloated government. Spending less money on overhead means that less of the tax money collected goes into collecting taxes.
Next up: potential economic benefits
Monday, November 15, 2010
The Case for a National Sales Tax: Part 1
Given the current economic situation, a lot of attention is being paid to tax policy. One of the biggest debates at the moment is over tax breaks and who should get them. I would like to make the case for a complete overhaul of the U.S. tax system with the implementation of a national sales tax. I certainly did not originate this idea and am not certain about some of the finer details. Overall, however, I think that the ideas behind a sales tax are sound. In order to discuss the general principles of such a tax system, I will use one of the more prominent proposals, FairTax, as the base example. Before I get into the specifics, I want to begin by saying that I have issues with the way that FairTax is promoted. The name itself is loaded. While I intend to argue that a national sales tax is indeed more "fair" than the current system, the name "FairTax" has a slimy feel to it. It is also often spoken of in terms of a tax-inclusive rate in order to make it seem lower than the traditional tax-exclusive rate that many are used to with current state sales tax rates.* In any case, it is worth setting aside the political haze that clouds every idea Congress tosses around in order to actually evaluate proposal.
FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.
That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.
* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.
FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.
That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.
* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.
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