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A Fair Tax


While the NC legislature is moving towards revising our current convoluted tax code, we can only hope the US Congress would do the same thing. Taxes are supposed to be about one thing: raising money from the people to fund a government for the people. We have gone far beyond that. The contorted code we have is a tribute to how government actually works when it changes from serving the people to serving special interests. Examples abound, but range from deductions for alternative energy sources to high taxes on tobacco products. Then, when the overburdened taxpayer realizes half of the money spent on accountants is just to comply with the variety of laws, in fact paying the accountant in order to keep said taxpayer from being punished for non-compliance, the wastefulness of the economic burden becomes clear.

Accountants should provide services to businesses which help them understand the expenses and cash flows of their business. Taxes should be simple to understand and comply with; an accountant shouldn’t be required in order to pay the taxes and stay within the law. But today our income tax laws are often impossible to comply with by individuals. Even small businesses must spend exorbitant amounts on tax filings, with page upon page of information, whose ostensible purpose is to provide money for government. Actually it seems the true purpose is to provide jobs for accountants, lawyers and bookkeepers, both within the government and without.

At the end of the day, any time an accountant or lawyer spends to comply with tax codes is economically wasted. It produces nothing while the sole purpose is an avoidance of government sanctions. So if the NC Legislature can come up with a replacement which eliminates this waste, we should be thankful. We can only wish the US Congress will do the same. Towards that end The Fair Tax is one proposal which would go a long way towards accomplishing just that.

Simply put, the Fair Tax is a sales tax. As sales taxes are today, it would be collected by those who sell to the general public. Unlike those today, it would also be collected on services. Since the economy we live in has a lot of services, those who supply them would have the pleasure of collecting sales taxes where today they do not. These would include lawyers, accountants, dentists and doctors, but those are where we spend our money. On their end, they already have the burden of complying with tax laws; the Fair Tax would only shift and simplify how they collect and pay those taxes. All they would have to do is keep up with how much tax they collect due to sales and write a check to the government for that amount. As they already keep up with sales, that will be a simple calculation. Businesses which already collect a sales tax will have no additional paperwork burden. That is the down side. The upside is the reason to support the Fair Tax.

Accountants will no longer be necessary for individuals and businesses, just to pay their taxes. Certainly they will be necessary to some, but not at the same level they are now. For individuals, staying compliant will require no paperwork at all. No w-2’s, no keeping receipts for deductions, no anything. No worrying about being audited. Which means the IRS would be much reduced in size. Instead of being a compliance bureaucracy with 70,000 pages of rules whose sole purpose is to catch you in a mistake, the IRS would have nothing to do with individuals.

An additional benefit is the encouragement to save. Since a person would not have anything taken from their paycheck, they would see all the money they make. But they would also see the taxes they would pay when they spend, so they would be more likely to save and slow down borrowing. This is good for the economy in the long run, but not in the short run. It slows people in their spending. Another benefit of that is it makes people actually feel the cost of government. When taxes are taken from your check before you get it, it’s just numbers above the amount that counts. But when the money goes into your account and then has to come back out to pay the taxes, you think about it differently. ‘Why is the government spending so much?’ would be the question every time you buy something.

Since this is a tax on goods and services, food and clothing, the question is raised: what about making the tax progressive? What is done to take care of the poor and lower their tax rate compared to the well off? The answer is simplicity itself. Every family would get a check from the government, every month, called a “prebate.” Based on the number of family members, basically every person in the US would get a check from the government based on the poverty level. This check, this prebate, would give each person, each family a check each month equal to the taxes they would pay at the poverty level of income. By doing this each family could spend on food and clothing, paying the additional sales tax; but with the prebate check, they will be reimbursed all the taxes paid, up to an income amount equal to the poverty level. To repeat, every person will get a check each month equal to the sales tax they would pay if spending an amount equal to the poverty level of income.┬áThe result is that only those who spend more than this will actually be paying taxes.

So the more you spend, the more taxes you pay, but the very poor will actually pay no taxes. Compare this to a young person working for minimum wage. They pay payroll taxes, then sales tax, and all the hidden taxes of our current convoluted system. With the fair tax, they’ll get to keep everything they earn and get a check back each month for the taxes they pay on what they spend.

What a deal.

Bonus Reading:┬ásee and “The FairTax Book” by Neal Boortz and John Linder


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