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Welcome to Michael's blog. Michael Andrew, (aka Michael The Maven) is a freelance producer, photography instructor, tech innovator, and when needed, disaster aid specialist. Disclaimer: Michael is a participant in Bhphoto & Amazon affiliate programs that provides an advertising commission if you purchase through links on this website.


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01.15.08         observations  

Why a "Fair Tax" is really a "Not So Fair" Tax


I am sure by now you have heard about the "Fair Tax" system. What is it? Under the current "fair tax" system, Federal Income Tax would be abolished, meaning when you got your pay check, all of it would be there. Wow doesn't that sound amazing? Read further:

Instead there would be an "effective" federal sales tax of an additional 23% (what this means is it will probably be more) so say you live in Alabama, which already has a 10% sales tax, and you buy some type of good for $1.00, the final amount due would be $1.33. But wait! There is more!

This federal sales tax wouldn't apply to just commodities, it would apply to EVERYTHING, including services, (yes, even medical expenses), while state sales tax would vary from state to state.

The theory behind this is that that the actual amount of taxes paid from the current system to the "fair tax" system would be about the same. Right? No- it depends on your tax bracket. Believe it or not, most families in the US are paying a tax rate of 10-17%. (Average House hold income is about 39K). Poverty level families (below 11K) would receive monthly checks to effectively be paying 0% taxes. So, what about everyone else who is in the 15K-81K range? Yes, this would equate to a tax increase under the "Fair Tax System". (BTW I have the stats if you would like to see the figures. You can also google it under : "Fair Tax Bad Idea", or Bruce Bartlett's PDF "Why the fair tax wont work.")

There are a few other enormous problems with this whole concept, the two biggest of which are: the cost of living and no more deductions.

A gallon of milk or loaf of bread is going to cost the same for everyone, whether they are in the poor, middle class, or upper income brackets. Someone who makes over $100,000 a year will be much more capable to provide the basic necessities than someone who makes the average household salary (abt 39K) "Poverty" level families would receive monthly checks to help subsidize their new cost of living expenses, but NOT the middle class.

The article on wikipedia says it better than I :

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)

What this means is the "Fair Tax" would effectively shift the tax burden onto the shoulders of the middle class.

On a positive note, a "Fair Tax" would be a tremendous benefit to anyone in the upper tax bracket, the more they make the better. This is the biggest advantage of this concept and makes it attractive. I believe those who are creative, industrious, productive, should be rewarded for their efforts. If you are making over $100,000 a year...you will want a "Fair Tax" system.

Under a "Fair Tax" there would be no standard deduction, nor would their be deductions for each of your children, which would mean that families with more children would have the additional cost of living burden placed upon them for each child, keep in mind a gallon of milk will go up 23%. Thus, a "fair tax" would hurt families with children, the more children, the greater the burden.

It would also mean that businesses would not be entitled very specific tax breaks, as used in the current system needed for starting and operating their businesses. Say a new business owner needed to buy a $1000 computer. The computer will now cost, $1333, and none of it would be deductible. Additionally, supply chain goods (needed for products, could be double or even triple taxed (once through each supplier). YIKES! Thus, a "fair tax" would hurt small business owners.

Oh yeah, one more thing....all the money you have saved up? Thats right, the money you have ALREADY paid taxes on? Yep...that money would instantly lose 23% of its value, because if you were to use it to purchase ANYTHING, you would be charged an additional 23% (including dividends and investment returns received)....thats right, you would be double taxed on using your savings money...the stuff you already paid taxes for. I don't see how this wouldn't cause an instant spike in inflation.

So to sum it up: The "Fair Tax"

Good for wealthy
Bad for middle class
Bad for families with children
Bad for small business owners
Triple bad for middle class families with children who run their own business.
Bad for anyone who has substantial savings or tax paid investment funds, like ROTH IRAs.

I will be the first to say I am not an economics expert, as well as the fact there are tons of problems with the current system. I like the "Fair Tax" idea in that it is simple, but when it comes down to it, I just don't believe it's a "fair" tax for everyone. Families shouldn't be penalized for having more kids (like China), or just because they fall into the middle tax bracket.

There are several studies on the "Fair Tax"- many are positive, some are not so positive. It seems the positive ones are very careful in how they are worded and focus on overall net economy growth projections, overall tax payment projections, and the amazing blunder of not considering what it would do to the average family and the average cost of living. What good is an overall effective 5% tax decrease, if you are now paying an additional 23% just to live?

Again, it's probably over my head, but from what research Ive done on it, this is what I am getting. Its difficult to speculate because all the details are not worked out, I just thought I would give you a crash course on it.

The experts disagree and they have all the charts to prove it....its one big roll of the dice and the middle class are the ones who will finance it. One more thing, a "Fair Tax" system would have to be approved by Congress. It will never happen.

I have a tax reform plan I think would work...its called the Producer Incentive Tax Reform....anyone want to know how it works?

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