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The FairTax bill proposed in Congress aims to abolish all federal income taxes, death taxes, capital gains taxes, payroll taxes and the IRS. It would establish a 23% national retail sales tax. Americans would be taxed on what they spend, not what they earn. Citizens and businesses would not file tax returns; however, businesses would file sales tax returns.
An important feature of the FairTax legislation is the prebate: the federal government would send a monthly check to all households of citizens and legal resident aliens that equals the estimated monthly FairTax that a family earning at the federal poverty level would pay. The amount a household receives depends on its family size. So, a family living at poverty level income would essentially pay no federal tax.
State and local governments, and businesses that collect sales tax will keep a small percentage of the revenue to cover the cost of collecting the tax and then forwarding it to the U.S. Treasury.
Yes: Support the FairTax
With the FairTax, everybody pays the same 23% rate on consumption; however, more tax burden will be shifted onto the wealthy with the FairTax, whereas currently households that earn less than $97,400 pay a larger portion of their income in taxes than households that earn more than $97,400.
This redistribution of tax burden away from the low and middle classes will occur because of the prebate and because the current system has thousands of legal loopholes for exemptions and deductions, which often are enacted at the benefit of special-interest groups. Since the FairTax is a straightforward 23% consumption tax, there is no room for special-interest manipulation of the system.
The current tax system is so complex that the government needs an entire agency, the IRS, to enforce and administer it. Furthermore, businesses and individuals must spend billions of dollars a year in order to comply with and file their taxes. The straightforward FairTax would increase taxpayer compliance because it is so simple, and it has virtually no filing and compliance costs. It will encourage foreign investment in the United States, and visiting tourists and current tax evaders would now contribute 23% of their spending, just like all other Americans.
Citizens will keep their entire paychecks (no federal tax deductions), but the federal government will still generate the same revenue if not more. Additionally, because businesses will no longer pass the cost of businesses taxes onto consumers, prices for goods and services will drop.
Because Americans will be taxed on what they spend, not earn, saving will be encouraged, which will make the economy less vulnerable to downturns caused by excessive debt. This system also will help the environment, because it will encourage citizens to re-use rather than to purchase new products (which are taxed), reducing consumption of resources.
You support this or similar arguments.
No: Against the FairTax
The real issue is not tax reform, but reducing government spending. Even if the FairTax would accomplish all that it promises, which it won't, it will not reduce federal spending. In fact, the FairTax could hurt the economy and therefore require government to spend more in order to stimulate a recovery and to fund an increased need for social welfare.
The FairTax claims that it will eliminate the IRS, but some de facto IRS agency, no matter what it is called, will be needed to enforce and administer tax collection. Shifting this burden to states and businesses is just asking for problems.
The FairTax will not eliminate state and local taxes, nor other federal taxes, such as gasoline and cigarette taxes. So depending on the state, citizens could pay a 30% consumption tax or higher. Furthermore, the claimed 23% consumption tax is a fallacy. In effect, the federal tax will be $30 on every $100 spent, without considering state taxes. With the FairTax, citizens will pay $23 on every $77 spent, not on every $100 spent.
A huge black market economy will develop so that individuals can avoid paying the consumption tax because no matter what the tax system, people will find ways to cheat it. As a result, the federal government will lose tax revenue.
Deductions that encourage private funding of charitable organizations will be eliminated, leaving the government to increase social services as the number of charitable organizations dwindle. Furthermore, because of prebate checks, a huge class will develop that is dependent on monthly government handouts.
But the main problem with the FairTax is that it will reduce federal tax revenue. Calculations to the contrary are based on wishful thinking and suspect economic projections.
You support this or similar arguments.
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