Thursday, March 16, 2006

Get Rid of the Income Tax

What American taxpayor likes the current system? And why would any American like it? It is absurdly complex, running 60,000 pages and nine million words, and it has been amended 14,000 times since the last serious attempt at tax simplification was made in 1986. The U.S. needs a better system.

Here is a passage from the Tax Foundation that explains why we need a change in how we collect taxes: "In 2005 individuals, businesses and non-profits will spend an estimated six billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This effectively imposes a $0.22 tax compliance surcharge on every dollar the income tax system collects. Projections show that by 2015 compliance costs will grow to $482.7 billion." This is non-productive money taken out of the economy just to meet the demands of tax compliance. No one can argue that such a system makes any sense at all. Try to imagine the shot to our economy of pumping more than a quarter of a billion dollars back into it.

The FairTax is a proposed solution to this problem, and legislation is currently before both the U.S. House of Representatives and the U.S. Senate to replace the current tax system with the FairTax in January of 2007. This is replacement, not reform. It does away with federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes. Under the FairTax you keep 100 percent of your income.

The FairTax is a single-rate, federal sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed.

A tax rate of 23 percent raises the same amount of federal funds as are raised by the current system, paying the universal rebate, and paying the collection fees to retailers and state governments. Unlike some other proposals, this rate has been independently confirmed by several different, non-partisan institutions across the country. Detailed calculations are available from You can find answers to frequently asked questions here.

The FairTax provides every family with a rebate of the sales tax on spending up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The rebate is paid monthly in advance. It allows a family of four to spend $25,660 tax free each year. The rebate for a married couple with two children is $492 per month ($5,902 annually). Therefore, no family pays federal sales tax on essential goods and services and middle-class families are effectively exempted on a big part of their annual spending.

Retail businesses collect the tax from the consumer, just as state sales tax systems already do in 45 states; the FairTax will simply be an additional line on the current sales tax reporting form. Retailers simply collect the tax and send it to the state taxing authority. All businesses serving as collection agents will receive a fee for collection, and the states will also receive a collection fee. The tax revenues from the states will then be sent to the U.S. Treasury.

I'm not taking any bets that the Congress will pass these bills, but wouldn't it be a pleasant change if they did?

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1 comment:

Buffalo said...

I am 100% for a flat tax without a basement.