- Predicted effects of the FairTax
Fair Tax Act" (USBill|110|HR|25/USBill|110|S|1025) is a bill in the United States Congressfor changing tax laws to replace the Internal Revenue Service(IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.cite web| title=H.R. 25: Fair Tax Act of 2007| work=110th U.S. Congress| publisher=The Library of Congress| date= 2007-01-04| url=http://thomas.loc.gov/cgi-bin/query/zRetailing?c110:H.R.25:|accessdate=2007-01-14] cite news| url=http://people.bu.edu/kotlikoff/WSJ%20Op%20Ed%203-7-05.pdf| format = PDF | last=Kotlikoff| first=Laurence| coauthors=|title=The Case for the 'FairTax'| publisher=The Wall Street Journal| date= 2005-03-07| accessdate=2006-07-23]
Supporters argue that a consumption tax, such as the FairTax, would have a positive impact on savings and
investment(not taxed), ease of tax compliance, increased economic growth, incentives for international businessto locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in global trade).cite web| url=http://www.fairtax.org/PDF/Open_Letter.pdf| format = PDF | title=An Open Letter to the President, the Congress, and the American people| publisher= Americans For Fair Taxation| accessdate=2006-07-23] The plan may increase cost transparency for funding the federal government and supporters believe it would have positive effects on civil liberties, the environment, and advantages with taxing illegal activity and illegal immigrants.cite web|url=http://www.americanchronicle.com/articles/viewArticle.asp?articleID=31824|title=A Fair Tax for Progressives and Conservatives|publisher=American Chronicle|last=Sipos|first=Thomas|date=2007-07-10|accessdate=2007-07-13] Because the FairTax plan would remove taxes on income, tax deductions would have no meaning or value, which concerns some law makers about losing this method of social incentive. There are also concerns regarding the repeal of the Sixteenth Amendment, transition effects on after-tax savings, impact to the income tax industry, incentives on credit use, and the loss of tax advantages to state and local bonds.
Tax burden visibility
last=Linder | first=John | coauthors=Boortz, Neal | publisher=American Solutions |date=2007-09-27 | accessdate=2007-10-04]
Effect on tax compliance costs
The cost of preparing and filing all business and personal income tax returns is estimated to be $250-$300 billion each year. Approximately the same amount of money was estimated for calculating the tax implications of business decisions. That means approximately $500 to $600 billion was spent in the process of collecting roughly four times as much in taxes. According to a 2005 report from the U.S. Government Accountability Office, the efficiency cost of the current tax system — the output that is lost over and above the tax itself — is between $240 billion and $600 billion every year.cite web| url=http://www.gao.gov/docdblite/summary.php?rptno=GAO-05-878&accno=A34598| last=| first=| title=Summary of Estimates of the Costs of the Federal Tax System| work=| publisher=U.S. Government Accountability Office|date=2005-08-26| accessdate=2006-07-23] cite web| url=http://www.freemarketnews.com/Analysis/32/2567/2005-10-11.asp?wid=32&nid=2567| last=Bartlett| first=Bruce| title=The Times is still wrong on taxation| work=| publisher=Free-Market News Network|date=2005-10-11| accessdate=2006-07-23] Supporters argue that the FairTax system would reduce these compliance and efficiency costs by 90% and return a larger share of that money to the productive economy. With the FairTax system, the cost of compliance would be built into the tax by allowing the
businessand the State to keep 1/4 of 1% of taxes collected.cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | id=ISBN 1-4033-9189-0 ] A 2007 study by the Beacon Hill Institutefound that the FairTax would save $346.51 billion in administrative costs and would be a much more efficient taxation system from the point of view of the administration, collection, and filing costs.cite web | format=PDF | url=http://www.beaconhill.org/FairTax2007/TaxAdminCollectionCosts071025%20.pdf | title=Tax Administration and Collection Costs: The FairTax vs. the Existing Federal Tax System | publisher= Beacon Hill Institute| accessdate=2008-01-13 | date=2007-09 | last=Tuerck | first=David | coauthors=Bachman, Paul; Sanchez-Penalver, Alfonso ]
Promotion of economic growth
In an open letter to the President, the Congress, and the American people, eighty economists, including Nobel Laureate
Vernon L. Smith, stated that the FairTax would boost the United States economy.cite web| url=http://www.fairtax.org/PDF/Open_Letter.pdf| last=| first=| coauthors=| title=Economists' Endorsement| work=An Open Letter to the President, the Congress, and the American people| publisher=Americans For Fair Taxation| date=| accessdate=2006-11-14] According to the National Bureau of Economic Researchand Americans For Fair Taxation, GDP would increase almost 10.5% in the year after the FairTax goes into effect.cite web| url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4390| last=Trowell| first=Christopher| title=Clean out America’s Economic Arteries| work=| publisher=Committee on Ways and Means| date=| accessdate=2006-07-24] Real investments could increase by as much as 76% initially and remain 15% above present levels. In addition, the incentive to work would increase by as much as 20%, the economy’s capital stockwould increase by 42%, labor supplyby 4%, output by 12%, and real wagerate by 8%. A study in 2007 by the Beacon Hill Instituteof Suffolk University stated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%.cite web| url=http://www.beaconhill.org/FairTax2007/EconomicEffectsFTBHICGEModel4-30-07.pdf | title=The Economic Effects of the FairTax: Results from the Beacon Hill Institute CGE Model | publisher=Beacon Hill Institute | last=Tuerck |first=David G.| coauthors=Haughton, Jonathan; Bhattarai, Keshab; Sanchez-Penalver, Alfonso; Viet Ngo, Phuong|date=2007-02 | accessdate=2007-09-18] Laurence Kotlikoffof Boston Universityfinds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%.cite web| title=Rebuttal to the tax panel report and recommendations| work=| author=| publisher=Americans for Fair Taxation|date=2006-11| url=http://www.fairtax.org/PDF/Excerpts_from_response_to_tax_panel-103006.pdf| accessdate=2006-11-02] Further, studies of the FairTax at Boston University and Rice Universitysuggests the FairTax will bring long-term interest rates down by as much as one third.cite web|url=http://www.kc.frb.org/publicat/econrev/pdf/4q95golb.pdf|title=How Would Tax Reform Affect Financial Markets?|last=Golob|first=John E.|date=1995|accessdate=2007-01-22] As falling tax compliance costs lower production costs, exports would increase by 26% initially and remain more than 13% above present levels.cite web| url=http://linder.house.gov/index.cfm?FuseAction=Resources.Home&Resource_id=04E511FD-7D87-4F50-B551-5996F29A075B| last=Linder| first=John| title=The FairTax| work=| publisher=The Online Office of John Linder| date=| accessdate=2007-07-17] According to Professor Dale Jorgenson of Harvard University’s Economics Department, revenues to Social Security and Medicare would double as the size of the economy doubles within 15 years after passage of the FairTax.cite web| url=http://www.fairtax.org/PDF/FairTaxFAQ.pdf| last=| first=| title=FairTax Frequently Asked Questions| work=| publisher=Americans For Fair Taxation| date=| accessdate=2006-11-14] Wall Street Journalcolumnist James Tarantostates the FairTax is unsuited to take advantage of supply-sideeffects and would create a powerful disincentive to spend money.cite news | url=http://www.opinionjournal.com/best/?id=110011009 | title=No Truck With Huck--II | publisher= Wall Street Journal| first=James | last=Taranto |date=2007-12-18 | accessdate=2007-12-20]
Opponents offer a
Nathan Associatesstudy commissioned by the National Retail Federationin 2000 that found a national sales tax bill filed by Billy Tauzin(Individual Tax Freedom Act) would bring a 3 year decline in the economy, a 4 year decline in employment and an 8 year decline in consumer spending.cite web| url=http://retailindustry.about.com/b/a/152273.htm| last=Vargas| first=Melody| title=Retailers Question Greenspan on Consumption Tax| work=National Retail Federation| publisher=About|date=2005-03-03| accessdate=2006-07-24] Proponents point out that the FairTax has different features than the Tauzin bill and that the study done by the NRF makes many adverse assumptions and does not take into account the removal of embedded tax costs or the inventory credit that refunds 23% of the cost of held inventory. The study, which represents supporters' worst-case scenario for a consumption tax, predicts that the economy will grow only 3% more in ten years than it would have under the income tax and that the increase in consumption will be 1.15% less in the first year relative to what it would have been under the income tax. The study concludes that consumption will be higher in the fourth year and every year thereafter than it would have been under the income tax.cite web| url=http://www.fairtax.org/pdfs/Why_retailers.pdf| last=| first=| title=Why retailers should support the FairTax| work=| publisher=Americans For Fair Taxation| date=| accessdate=2006-07-24] Research in 2006 on the FairTax plan by Arduin, Laffer & Moore Econometrics shows that consumption would increase by 2.4% in the first year of the FairTax. The increase in consumption would be fueled by the 1.7% increase in disposable (after-tax) personal income. By the 10th year, consumption would increase by 11.7% over the current tax system; and disposable income would be up by 11.8%.cite web| url=http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf| last=| first=| coauthors=| title=A Macroeconomic Analysis of the FairTax Proposal| work=| publisher=Arduin, Laffer & Moore Econometrics |date=2006-02| accessdate=2006-11-07]
Effect on international business locality
Global corporations consider local tax structures when making planning and capital investment decisions. Lower corporate tax rates and favorable transfer pricing regulations can induce higher corporate investment in a given locality. Such investment translates into higher economic growth.
Ireland's real GDP growth was almost three times higher than the European Unionaverage between 1991 and 2000. This is partly attributed to the fact that, during the decade, Ireland taxed corporate profits from manufacturing at 10%, the lowest in the EU. The United States currently has the highest combined statutory corporate income tax rate among OECDcountries.cite web| url=http://www.taxfoundation.org/news/show/1175.html| last=Hodge | first=Scott| coauthors=Atkins, Chris| title=The U.S. Corporate Income Tax System: Once a World Leader, Now A Millstone Around the Neck of American Business| work=| publisher=The Tax Foundation|date=2005-11-15| accessdate=2006-08-03] The FairTax would remove the corporate income tax, which supporters argue would make the United States the largest corporate tax havenin the world.
Bill Archer, former head of the
House Ways and Means Committee, asked Princeton Universityeconometricists to survey 500 European and Asian companies regarding the impact on their business decisions if the United States enacted the FairTax. Of these companies, 400 responded that they would build their next plant in the United States while the remaining 100 companies said they would move their corporate headquarters to the United States.cite web| url=http://www.actionamerica.org/taxecon/tickfast.shtml| last=Gaver| first=John| title=The Economy Bomb Ticking Down Faster| work=| publisher=Action America|date=2006-01-10| accessdate=2007-06-20]
The United States is the only one of 30
OECDcountries with no border adjustment element in its tax system.cite web| url=http://waysandmeans.house.gov/hearings.asp?formmode=view&id=5196| last=Linbeck| first=Leo| title=Testimony Before the Subcommittee on Select Revenue Measures| work=| publisher=House Committee on Ways and Means|date=2006-06-22| accessdate=2006-08-11] Proponents state that because the FairTax would automatically be border adjustable, the 17% competitive advantage, on average, of foreign producers would be eliminated, immediately boosting U.S. competitiveness overseas and at home. Leo Linbeck, chairman of FairTax.org, has stated that U.S. manufacturers and sellers can not compete successfully with foreign producers because of U.S. tax policy. "The Ways and Means Committee is tasked with writing the taxation laws that raise revenues for the nation but the fact that foreign nations routinely tax U.S. products upon entry and that these nations forgo national taxes on exports to the United States is a Ways and Means blind spot that has all but killed the 'Made in America' label".cite web| url=http://michfairtaxation.blogspot.com/| last=Linbeck| first=Leo| title=FairTax Chairman Mourns "Made In America" Label as Victim of U.S. Tax Code| work=| publisher=Americans For Fair Taxation| date=| accessdate=2006-08-06] Under the FairTax, American companies doing business internationally would be able to sell their goods at lower prices but at similar margins, and this would bring jobs to America. In addition, U.S. companies with investments or plants abroad would bring home overseas profits without the penalty of paying income taxes, thus resulting in more U.S. capital investment. This would result in imports and domestic production competing on a level playing field. Exported goods would not be subject to the FairTax, since they would not be consumed in the U.S.; but imported goods sold in the U.S. would be subject to the FairTax because these products would be consumed domestically.
Repatriation of offshore accounts
John Linder asserts that an estimated 11 trillion dollars is currently held in foreign accounts, largely for tax purposes, and is growing by $800 billion per year.cite web|url=http://www.fairtax.org/news/events.aspx?eventid=9|title=Rep. John Linder updates volunteers |publisher=Americans For Fair Taxation|last=Linder|first=John|date=2007-01-30|accessdate=2007-02-04] cite web|url=http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore.pdf | title=The Price of Offshore | format=PDF | publisher=Tax Justice Network | date=2005-03 | accessdate=2008-02-26] Former
Federal ReserveChairman Alan Greenspanpredicts that enactment of the FairTax would result in a large portion of those funds being transferred to U.S. banks, where they would become available to U.S. capital markets, bringing down interest rates, and otherwise promoting economic growth in the United States instead of the countries where those funds are currently held.
Because the FairTax proposal would replace various taxes with a single sales tax, several areas may experience unique effects through the transition.
Repeal of Sixteenth Amendment
If the FairTax bill were passed, permanent elimination of income taxation would not be guaranteed; the FairTax bill would repeal much of the existing tax code, but the Sixteenth Amendment would remain in place. Cases decided by the
United States Supreme Courtafter the ratification of the Sixteenth Amendment have established that Congress has the power to enact an income tax even if the amendment did not exist.cite web| url=http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=240&page=1| last=| first=| title=Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916)| work=U.S. Supreme Court| publisher=Findlaw|date=1916-01-24| accessdate=2006-08-07] The elimination of the possibility that income taxation would return (through a separate Congressional bill), requires a repeal of the Sixteenth Amendment to the United States Constitutionalong with expressly prohibiting an income tax. This is referred to as an "aggressive repeal". The Constitution, however, does not require an income tax, it only allows one. Separate income taxes enforced by individual states would be unaffected by the federal repeal.
Since passing the FairTax would only require a simple majority in each house of the
United States Congressand the signature of the President, and enactment of a constitutional amendmentmust be approved by two thirds of each house of Congress, and three quarters of the individual U.S. states, it is possible that passage of the FairTax bill would simply add another taxationsystem. If a new income tax bill was passed after the FairTax passage, a combined system could develop. However, there is nothing preventing the addition of a national sales tax, or VAT tax, on top of today's income tax system. The Americans For Fair Taxationplan is to first pass the FairTax and then to focus grassroots efforts on HJR 16, sponsored by Congressman Steve King(R-IA), that calls for the repeal of the Sixteenth Amendment.cite web| url=http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.j.res.00016:| title=H. J. RES. 16| work=110th U.S. Congress| publisher=The Library of Congress|date=2007-01-17| accessdate=2007-01-19]
Congressman Linder, the bill sponsor, has stated "If the FairTax is enacted, I expect that the Congress and states would promptly begin consideration of legislation to repeal the Sixteenth Amendment. To make certain that occurs, however, I am in favor of adding language to H.R. 25 during the 111th Congress that includes a
sunset provision, meaning that either we succeed in repealing the Sixteenth Amendment within five years after the implementation of the FairTax or the FairTax goes away. In my view, we simply cannot risk having both a national income tax and a national sales tax in place at the same time."cite web| url=http://linderfairtax.house.gov/index.cfm?FuseAction=FAQs.View&FAQ_id=20| last=Linder| first=John| title=John Linder's FairTax FAQ| work=| publisher=Congress| date=| accessdate=2007-01-14]
Effect on savers
Individuals under the current system who accumulated savings from ordinary income (by choosing not to spend their money when the income was earned) paid taxes on that income before it was placed in savings (such as a
Roth IRAor CD). When individuals spend above the poverty level with money saved under the current system, that spending would be subject to the FairTax. People living through the transition may find both their earnings and their spending taxed.cite news | url=http://www.opinionjournal.com/best/?id=110010996#flailing | title=Flailing the Fruga | first=James | last=Taranto | publisher= Wall Street Journal|date=2007-12-17 | accessdate=2007-12-20] Critics have claimed that the FairTax would result in unfair double taxation for savers and suggest it does not address the transition effect on some taxpayers who have accumulated significant savings from after-tax dollars, especially retirees who have finished their careers and switched to spending down their life savings.cite web| url=http://economics.about.com/cs/taxpolicy/a/fairtax.htm| last=Moffatt| first=Mike| title=FairTax - Income Taxes vs. Sales Taxes| work=| publisher=About| date=| accessdate=2006-07-25] Boston University economist Lawrence Kotlikoffargues that a larger tax burden should be placed on wealthy retirees to pay for their social programs and suggests the current tax system pushes the burden to their children.cite book | first=Laurence| last=Kotlikoff | coauthors=Burns, Scott | year=2004 | title= | publisher= MIT Press|id=ISBN 0-262-11286-8]
Supporters of the plan argue that the current system is no different, since compliance costs and "hidden taxes" embedded in the prices of goods and services cause savings to be "taxed" a second time already when spent. The rebates would supplement accrued savings, covering taxes up to the poverty level. The income taxes on capital gains, social security and pension benefits would be eliminated under FairTax. The FairTax would also eliminate what some claim to be the double taxation on savings that is part of estate taxes. In addition, the FairTax legislation adjusts Social Security benefits for changes in the price level, so a percentage increase in prices would result in an equal percentage increase to Social Security income.cite web| title=H.R. 25: Fair Tax Act of 2007| work=110th U.S. Congress| publisher=The Library of Congress|date=2007-01-04| url=http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.25:| accessdate=2007-01-14] Supporters suggest these changes would offset paying the FairTax under transition conditions.
In contrast to ordinary savings, money in tax-deferred savings plans such as IRA, 401k, etc. would be withdrawn tax-free. There is currently $11 trillion in such accounts. This represents future tax revenue owed to the federal government under the income tax system, which has been estimated at $3 trillion.cite web| url=http://emlab.berkeley.edu/users/burch/e231_sp03/Boskin.pdf| last=Boskin| first=Michael| title=Future Income Tax Revenue from Deferred Accounts| work=Stanford University| publisher=University of California, Berkeley|date=2003-01| accessdate=2006-07-25] This revenue would then fall under the FairTax system for collection.
Income tax industry
During the transition, many or most of the employees of the IRS (105,978 in 2005)cite web| url=http://www.irs.gov/pub/irs-soi/05db33ps.xls| last=| first=| title=IRS Labor Force, Compared to National Totals for Civilian and Federal ).
In the period before the FairTax was implemented, there could be a strong incentive for individuals to buy goods without the sales tax using credit. After the FairTax was in effect, the credit could be paid off using untaxed payroll. If credit incentives do not change, opponents of the FairTax worry it could exacerbate an existing consumer debt problem.cite web| url=http://www.ombwatch.org/article/articleview/3530/1/454| last=| first=| title=Household Debt: A Growing Challenge for American Families and Federal Policy|work=| publisher=OMB Watch|date=2006-07-25| accessdate=2006-08-07] On the other hand, proponents of the FairTax note that this effect could also allow individuals to pay off their existing (pre-FairTax) debt quicker. With the retail inventory tax credit, and the removal of embedded taxes in the retail prices of goods and services, it is unknown whether this will be an issue.
Other indirect effects
Like any policy change, the FairTax proposal can affect other changes in areas such as markets and behaviors:
Home mortgage interest deduction
The current federal income
tax lawallows individuals to deduct the home mortgage interest costs from taxable income (unless the taxpayer is subject to the Alternative Minimum Tax).cite web| url=http://www.irs.gov/pub/irs-pdf/p936.pdf| title=Publication 936| publisher=Internal Revenue Service|date=2005|accessdate=2006-11-13] Home mortgage interest is one of the few personal expenditures that is treated in this manner. Someone paying a 25% income tax rate would receive $250 back from the government for $1,000 expended in home mortgage interest. While there is no deduction for payroll taxes and most do not itemize the income tax deduction for full benefit, this preferential treatment of mortgage interest encourages households to spend relatively more of their income on housing than would otherwise be the case.
The FairTax would be tax free on mortgage interest up to the basic
interest rateas determined by the Federal Reserve. The interest above the basic rate applied by the lender is a financial intermediation service and is subject to the FairTax (on a typical home mortgage only about one-half of one percent of interest would be subject to tax). Several economic studies have estimated that switching from an income tax system to a consumption tax system such as the FairTax would result in an interest rate drop of approximately 25%. These changes would result in a decreased cost for home buyers. As a comparison to the FairTax for encouraging home ownership, the current tax system would have to allow all taxpayers to fully deduct the purchase of used property against income and payroll taxes, expand the mortgage interest deduction so that it permits a deduction against payroll taxes, fully untax interest income to lenders and institutions, and fully untax returns on savings. However, since several areas would be tax free under the FairTax plan, it could decrease the social incentive to spend more on homes in favor of savings, education, or other investments.
Like the home mortgage interest deduction, charitable giving receives preferential treatment under current tax law allowing individuals to deduct the
donation, to certain charities, from taxable income. Someone paying a 25% income tax rate would receive $250 back from the government for a $1,000 donation. While there is no deduction for payroll taxes and most do not itemize the deduction for full benefit, this encourages households to donate more of their income to charity than would otherwise be the case. As the FairTax would only tax new retail purchases, donations to charity would be made with untaxed income (comparable to a deduction on both income and payroll taxes). The FairTax would also remove the prohibition of political speech by non-profits, therefore removing the threat to non-profit status. Taxable property and services purchased by a qualified non-profit or religious organization 'for business purposes' would not be taxable.cite web| url=http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnReligious.pdf| last=| first=| title=The impact of the FairTax on religious and other charitable giving| work=| publisher=Americans For Fair Taxation| date=| accessdate=2006-08-13]
FairTax advocates state that total philanthropy as a percentage of
GDPhas held steady at around 2% for at least two decades, regardless of changes in income tax deductibility. According to the National Bureau of Economic Research, GDP would increase almost 10.5% in the first year after the FairTax goes into effect. FairTax advocates claim this economic boost, along with an estimated 8% real wageincrease, would strengthen charitable giving. In a 2007 study, the Beacon Hill Institute concluded that total charitable giving would increase under the FairTax, although increases in giving would not be distributed proportionately amongst the various types of charitable organizations.cite web| url=http://www.beaconhill.org/FairTax2007/FTaxCharitable%20GivingBHI4-24-07.pdf | title=The FairTax and Charitable Giving| publisher=Beacon Hill Institute | last=Tuerck |first=David G.| coauthors=Haughton, Jonathan; Bachman, Paul; Sanchez-Penalver, Alfonso; Dinwoodie, Sara|date=2007-02 | accessdate=2007-09-18] "Due to differences in preferences for type of charitable organizations between itemizers and non-itemizers, religious charities stand to gain disproportionately under the FairTax, while education, health, and cultural charities will actually suffer a small loss."
Proponents believe environmental benefits would result both indirectly and directly from implementation of the FairTax.cite web| url=http://www.greenearthmarket.com/index.asp?PageAction=Custom&ID=1#fairtax | title=Green Earth Market Endorsement | publisher=
Green Earth Market| accessdate=2007-12-10] Former Senator Mike Gravelhas called it a " green tax".cite web|url=http://www.pjvoice.com/v26/26300words.aspx | title=Interview with Senator Mike Gravel | accessdate=2007-12-11 | publisher=The Philadelphia Jewish Voice] The concepts of environmental economicscome into play with some of the aspects suggested. With the FairTax being levied only on new goods and services, with no federal tax charged on used goods, supporters suggest a systemic incentive to buy used goods is introduced. Consequently, re-use and re-sale of used goods is encouraged.cite web| url=http://www.gravel2008.us/?q=fair_tax | title=FairTax | accessdate=2007-12-11 | publisher=Mike Gravel ] With the subsequent increase of the used-goods market (and with new goods being taxed) it is suspected that people would put more emphasis on maintenance of things for longer use and better resale value, and that they may also shy away from disposable goods. The significant reduction of paperwork for IRS compliance and tax forms is estimated to save about 300,000 trees each year. With the expected increase of business and manufacturing movement to the U.S., more goods consumed domestically will be produced domestically. This may reduce international shipping and consequent environmental impact, as well as production in countries with less stringent pollution controls.
tate and local government debt
The federal income tax system provides tax advantages to state and local
municipal bonds.cite web| url=http://bonds.yahoo.com/sm_bd5.html| last=| first=| title=Types of Bonds| work=SmartMoney.com| publisher=Yahoo Finance| date=| accessdate=2006-07-24] Specifically, the interest paid on such securities is exempt from federal taxation. This tax discount allows state and local governments to issue debt at low yields, which reduces their interest costs. By eliminating income taxes, FairTax would remove the federal tax advantage of holding state and local bonds as all investments would become tax free.cite web| url=http://www.fairtax.org/PDF/TheImpactOfTheFairTaxOnTaxExemptBondholders.pdf| last=| first=| title=Impact of the FairTax on Tax-Exempt Bondholders| work=| publisher=Americans For Fair Taxation| date=| accessdate=2006-07-28] However, the Treasury department has called for the elimination of these special tax provisions under the current system in an effort to broaden the tax base and reduce corporate tax rates.cite web| url=http://www.ajc.com/business/content/business/stories/2007/07/27/taxes0727.html |title=Paulson: Taxes hurt U.S. globally | last=Geewax |first=Marilyn | publisher=The Atlanta Journal-Constitution |date=2007-07-27 | accessdate=2007-07-27] State and local governments often exempt their own taxes when issuing bonds, so they could still contain some advantages. Issuers may have to offer higher interest rates to attract investors.
The current system of taxation, in many cases, provides incentives for illegal immigrants and companies that employ them. It is estimated that approximately 5 million illegal immigrants are paid off the books ("under the table") in cash allowing employee and employer to avoid paying federal taxes estimated at $35 billion a year.cite web| url=http://www.bearstearns.com/bscportal/pdfs/underground.pdf| last=Justich| first=Robert| coauthors=Ng, Betty| title=The Underground Labor Force Is Rising To The Surface| work=| publisher=Bear Stearns|date=2005-01-03| accessdate=2006-07-28] Advocates claim the FairTax would provide incentive for illegal immigrants to legalize as they would otherwise not receive the FairTax rebate. Illegal immigrants would pay the maximum effective tax rate. There would also be no federal tax savings to companies that hire illegal immigrants. However, employers could still benefit by not providing other payment options such as unemployment and
workers' compensation. Due to the FairTax burden, wage increases would be required for illegal immigrants to retain the same buying power. This would allow Americans to more effectively compete for jobs held by illegal immigrants.
Proponents believe that the FairTax would have positive effects on civil liberties that are sometimes charged against the income tax system. Some of these include
social inequality, economic inequality, financial privacy, self-incrimination, unreasonable search and seizure, burden of proof, and due process. [cite web|url=http://cato.org/pubs/tbb/tbb-0204-2.html |title=Top Ten Civil Liberties Abuses of the Income Tax|last=Edwards|first=Chris|publisher=Cato Institute|date=2002-04|accessdate=2007-07-13] Proponents state the FairTax would remove the exemptions and deductions that discriminate against gays, singles, childless couples, and others based on spending and lifestyle choices. [cite web|url=http://www.americanchronicle.com/articles/viewArticle.asp?articleID=31824|title=A Fair Tax for Progressives and Conservatives|publisher=American Chronicle|last=Sipos|first=Thomas|date=2007-07-10|accessdate=2007-07-13] The principles of an income taxregarding individual libertyare also argued by critics. Frank Chodorovwrote "... you come up with the fact that it gives the government a prior lien on all the property produced by its subjects." The government "unashamedly proclaims the doctrine of collectivized wealth. ... That which it does not take is a concession."cite web|url=http://www.mises.org/story/1597| title=The Origin of the Income Tax|publisher= Ludwig von Mises Institute|last=Young|first=Adam|date=2004-09-07|accessdate=2007-11-07]
Distribution of tax burden
The impact of the FairTax on the distribution of the tax burden is a point of dispute. The plan's supporters argue that it would decrease tax burdens,cite web| url=http://people.bu.edu/kotlikoff/Comparing%20Average%20and%20Marginal%20Tax%20Rates%2010-17-06.pdf| last=Kotlikoff| first=Laurence| coauthors=Rapson, David|title=Comparing Average and Marginal Tax Rates under the FairTax and the Current System of Federal Taxation| work=| publisher=Boston University|date=2006-11| accessdate=2006-11-04] broaden the tax base, be progressive, increase
purchasing power,cite web| url=http://people.bu.edu/kotlikoff/Simulating%20the%20Dynamic%20Macroeconomic,%20October%204,%202006.pdf| last=Kotlikoff| first=Laurence| coauthors=Jokisch, Sabine|title=Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax| work=| publisher=National Bureau of Economic Research & Centre for European Economic Research|date=2006-09| accessdate=2006-10-31] and tax wealth,cite web| url=http://people.bu.edu/kotlikoff/WSJ%20Op%20Ed%203-7-05.pdf| last=Kotlikoff| first=Laurence| coauthors=|title=The Case for the 'FairTax'| work=| publisher=The Wall Street Journal|date=2005-03-07| accessdate=2006-07-23] while opponents argue that a national sales tax would be inherently regressive and would decrease tax burdens paid by high-income individuals.cite web| url=http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/| last=Regnier| first=Pat| title=Just how fair is the FairTax?| work=| publisher=Money Magazine|date=2005-09-07| accessdate=2006-07-20] Sales taxes are normally considered regressive, however, the FairTax provides a rebate that supporters argue would create a progressive effective rate on consumption. Under the FairTax, a low-income family may spend $25,000 on goods and services consuming 100% of their income. A higher income family making $100,000 may spend $80,000 on goods and services and save $20,000. The higher income family is consuming only 80% of their income on taxable goods and services. According to economist William G. Gale, the percentage of income taxed is regressive (using a cross-section time frame).cite web| url=http://www.brookings.edu/comm/policybriefs/pb31.htm| last=Gale| first=William| coauthors=|title=Don't Buy the Sales Tax| work=| publisher=The Brookings Institution|date=1998-03| accessdate=2006-07-23] However, when presented with an estimated effective tax rate, the low-income family above would pay a tax rate of 0% on the 100% of consumption and the higher income family would pay a tax rate of 15% on the 80% of consumption. The effective tax rate is progressive on consumption. Using a larger time frame, the other 20% would be consumed and taxed at some point in the future.
Americans For Fair Taxation
Distribution of the FairTax burden
Revenue neutrality of the FairTax
*cite book | first=Neal | last=Boortz | coauthors=Linder, John | year=2006 | title=The Fair Tax Book | edition=Paperback | publisher=
Regan Books| id=ISBN 0-06-087549-6
*cite book | first=Al | last=Ose | year=2002 | title=America's Best Kept Secret Fairtax: Give Yourself a 25% Raise | edition=Paperback | publisher=Authorhouse | id=ISBN 1-4033-9189-0
*cite book | first=Laurence| last=Kotlikoff | coauthors=Burns, Scott | year=2004 | title= | publisher=
MIT Press|id=ISBN 0-262-11286-8
*cite book | first=Edward, J. | last=McCaffery | year=2002 | title=Fair Not Flat : How to Make the Tax System Better and Simpler | edition=Hardcover | publisher=
University Of Chicago Press| id=ISBN 0-226-55560-7
* [http://www.fairtax.org FairTax.org] - Americans For Fair TaxationLegislation:* [http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.25.IH: H.R.25: "Fair Tax Act of 2007"] - Text of House bill H.R.25:* [http://thomas.loc.gov/cgi-bin/query/z?c110:S.1025: S.1025: "Fair Tax Act of 2007"] - Text of Senate bill S.1025
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