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Is The FairTax Act Really Fair?

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I am starting to think so. Right now, I am reading The FairTax Book: Saying Goodbye to the Income Tax and the IRS by Neal Boortz and Congressman John Linder. Basically the book is how about how we should replace the IRS and all the associated taxes it takes out of our paychecks with a consumption tax on everything we buy. No longer would individuals or companies pay income taxes…your paycheck would be your paycheck. If you make $25 per hour and work 40 hours per week, your paycheck would actually be $1,000…not $1,000 minus taxes. Sounds good right?

The only concern I had about this before I started reading the book was “Jeez, I don’t really want a loaf of bread to cost $5.00 because of the consumption tax” but the authors explained why this would not happen. See, we don’t normally think about it, but consumers actually pay the corporate taxes as we buy things….businesses just act as a pass-through – passing their tax on to us, and it is reflected in the price of goods. From the guy that grows the seeds for the bread all the way up to the grocery store, the tax on each step along the way is just tacked on to the price of each step, meaning we end up paying the entire tax bill once the bread reaches our dinner table. With the FairTax act, none of the steps would be taxed…just the final product. So the price of bread would remain the same at the end once all the taxes along the way are removed, meaning we wouldn’t really pay any more for the same product then we do now. Interesting, no?

In theory, I imagine most people pay about 33% of their paycheck to the government, but the FairTax would be a flat tax on consumer goods of 22%. Of course, you would think then that companies would just keep that 22% as profit instead, but the authors say that due to market forces and competition, companies would not be able to keep that much as they fight for your dollar, so the price of goods would come down.

I am not finished with the book yet, I am only about half way done…but so far, every question I come up with is slowly being answered and I am in support of the FairTax idea. Anyone out there read or heard of this idea? If so, I would appreciate your thoughts on it and maybe we can have a nice dialog about the pros and cons.


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Comments (12)

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  1. Mer says:

    Interesting. I have a question, though.

    The federal budget last year was approximately 3% of GDP. So, everything I buy, and everything everyone else buys, is taxed 3% to do our collective part to run the federal government. Let’s assume that I pay 3% for state taxes and another 1% local taxes, too. All of that added up is 7%. Where does the other 15% of the flat tax go?

  2. David says:

    As far as I understand it right now, that 15% goes to the government as they are no longer taking any income, SS, medicare, etc out of your check.

    Also, I just learned that under this plan, each person will get a rebate check of the taxes from the govt. on necessity items – food, toilet paper, etc.

  3. Mer says:

    So the plan is for the government to overtax us each individually, essentially compelling each citizen into giving the government a free loan, and then cross its bureaucratic, pudgy little fingers that we we’ll forget to ask for the money back.

    As a rule, I *really* like flat taxes, but there is nothing flat about either reserving all taxes to come out of consumer’s pockets (which explains why we’re paying an additional 15%) or issuing government “refund” checks.

  4. David says:

    That plan is already in place….they take money out of each check and then people are happy to get a refund of their own money. I have no idea exactly what they take out unless I go look…I would much rather get all my money and then only get taxed when I buy stuff. The history of the income tax in this book is very interesting; it was never supposed to be. Get it from the library and take a look. I was not that much in favor of this until I started reading it, and now it makes total sense.

  5. Mer says:

    That plan is already in place”¦.they take money out of each check and then people are happy to get a refund of their own money.

    I know, and it’s appalling. I will definitely check it out, though.

  6. KMC says:

    Sounds good…until I think about the tax-deferral of my 401(k) or the money from Roth IRA distributions (tax-free). All those things get completely thrown out of whack with a VAT. I’ve been saving based on an income tax; if that changes, my whole strategy is dead. I don’t think I’ll have too much to worry about though. I don’t see a flat tax or VAT happening.

  7. David says:

    According to the plan KMC, those are still tax free…

  8. Shadox says:

    This plan is bad for a number of reasons. Here are the first two:

    1. It is regressive – poorer people who spend most if not all of their paychecks would be taxed on every dollar immediatly. People who are better off and save some of their money, will pay taxes on some of it, and the very rich – who sometimes spend mere pennies on every dollar that they make would pay close to nothing… sounds fair to you?

    2. It is no progressive – the plan as I undertstand is would tax everyone’s consumption at the same rate. So, while the rich are only taxed on a tiny portion of their income, and the poor are taxed on every dime, the poor would also be paying the same RATE on every dollar spent… double whammy for the poor.

    Sounds like an excellent plan to me…

  9. David says:

    That’s EXACTLY what I thought at first, but now that I read the book I understand it better. Of course, I will look into it a little deeper using other sources, but so far it makes sense after reading about it.

  10. Luke says:

    I liked the book a ton and really would love for something of this nature to be implemented…Of course our government is so damn big an onerous that getting this off the ground is a task that wont happen…

    There is something about everyone paying equally that I like….It is simply put….fair.

    I dont make millions, but being taxed at the same rate and on consumption promotes me to save IMHO…It promotes me to buy second hand and also hold onto items a tad longer than normal…And the whole rebate thing is great in theory, but I dont think the general population would jump on board…

  11. david says:

    I’m with you Luke…if only we could get something like this passed, it would sure make life simpler. The tax code as it is ridiculous!

    Those people who say that the rich won’t pay their fair share because the tax would not be progressive – the rich don’t pay a fair amount now, so if that is a main concern, it really would not be any different.

  12. […] Is The FairTax Act Really Fair? I am starting to think so. Right now, I am reading “The FairTax Book: Saying Goodbye to the Income Tax and the IRS” by Neal Boortz and Congressman John Linder. Basically the book is how about how we should replace the IRS and all the associated taxes it takes out…… […]

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