And cleaning up the tax base would, on balance, allow the economy to. The fair tax movement is based on the idea that most federal taxes. I first heard about the fairtax several years ago, and every so often i spend some time perusing their website for information. Or, as economists alvin rabushka and robert hall put it, taxing income taxes what people contribute to the economy. Advocates expect a consumption tax to increase savings and investment, ease tax compliance and increase economic growth. The fair tax act fta is presently drafted to impose a national consumption tax rate of 23% for one year after taking effect, which is reported to approximate the historically average annualized u.
If you want an example of a real fair tax, then consider the equal tax. A consumptionbased tax, sometimes called the fair tax, is one alternative to the current u. It is a nonpartisan 501c4 grassroots organization solely dedicated to replacing the current income tax code with a national retaillevel consumption tax. Most countries have consumption taxes at some level and proposals exist in the united states to shift from a mainly progressive tax system to a system that utilizes consumption taxes. That percentage would then fluctuate annually based on gross federal revenue intake during the prior fiscal year. This paper concludes that the fair tax plan would be more suitable for the united states than the current federal income tax. One of the most vocal critics of the fair tax is bruce bartlett, a former u. Consumption tax financial definition of consumption tax. A retail sales tax is a flatrate tax on all sales from businesses to households.
The pros and cons of a consumption tax len burman and. The citizenry pays no tax on an amount equal to the cost of living for a family of 4. A consumption tax would be fair and efficient fairtax. Any tax plan that does not doubletax saving and investment is a consumption tax, including a flat tax, the new flat tax, a national retail sales. Under a consumptionbased tax system, the rate on consumption is the same 20% as in the incomebased system. The fair tax movement is based on the idea that most federal taxes, including social security and payroll taxes, should be eliminated and replaced instead with a. A retail sales tax, valueadded tax, the flat tax, and the xtax are closely related. Just remember that taxes based on spending put you in control for better or worse so make sure any new financial gains arent offset by impulsive purchases. Advocates expect a consumption tax to increase savings and investment. Second, since wealthy households would benefit most from the switch to a consumptionbased tax, it seems reasonable to ask them to pay some of the costs. Gst is called a consumption based tax because of it was payable to the state in which goods or services are actually consumed there is a logical reason behind gst being a consumption based tax. Hearing on tax reform and consumptionbased tax systems july 26, 2011. Florida has a statewide sales tax rate of 6%, which has been in place since 1949.
In another study, they state the fairtax would offer the broadest tax base an. A flat consumption tax would be fair and efficient the. Under the fair tax plan, only the amount of income you spend gets taxed. The fairtax is assessed on all retail sales for personal consumption on new goods and. As a consumption tax, it provides me encouragement to save knowing. A consumption tax can both encourage much stronger economic growth and apply a fair and equitable tax burden without applying a tax on capital gains and dividends. The conclusion of the republican tax plan, the better way, is to stay with an income tax despite the plan admitting that consumptionbased tax systems are widely regarded to be more progrowth than incomebased tax systems. While a tax on consumption might be a possibility in the future, critics say there are many reasons why the fair tax is not a feasible plan. If we can assume goods or services as the horse, gst is a horse rider. In contrast to a progressive income tax, which levies greater taxes on higherlevel earners, vat applies equally. The core idea of the fair tax act of 2003, the idea to replace the income tax with a sales tax, is not a new one.
Consumptionbased tax or a destinationbased tax is essentially a tax levied at the time of consumption. But hoagland addresses this through a prebate program that is calculated based on an annually adjusted federal poverty level income basis. A valueadded tax vat is equivalent to a retail sales tax but it collects the tax in. The fairtax book saying goodbye to the income tax and the irs. A consumption tax versus a federal income tax in the. Many studies show that longterm incomes would rise.
In subsequent years the rate would adjust annually based on federal receipts in the previous fiscal year. The fair tax plan is a sales tax proposal to replace the current u. The second section describes three widely discussed versions of a consumption tax. Fairtax book was written to spread the message of a national retail sales tax. A reform plan that establishes a consumption tax should be evaluated on its merit independent of the current system. Book advocating a national consumption tax misleads readers on.
For example, groceries and other necessities may be exempt or taxable at a low rate. The case against a consumption tax naked capitalism. It abolishes all federal personal and corporate income taxes, and ends all taxes on gifts, estates, capital gains, alternative minimums, social security, medicare, and selfemployment. Whether a tax system is fair is a complicated economic and philosophical question, one that inevitably involves oversimplification and subjective judgment. Benefits of a consumptionbased tax could income tax be. It also has a responsibility to design a tax system that is fair and efficient. A consumption taxalso known as an expenditures tax, consumedincome tax, or cashflow taxis a tax on what people spend instead of what they earn. My previous issues with a consumption tax was its impact on low income earners. Tom tancredo and duncan hunter for their support of the fairtax. Linder states the fairtax is presented as a 23% tax rate for easy comparison to income and employment tax rates the taxes it would be replacing. Federal sales taxes are widely used in other countries around the world, and given the low tax burden compared to canada and europe, it is at least plausible that the federal government could obtain enough revenue from a sales tax in order to completely replace federal income taxes. The prebate would help, but once that money is spent, it will be taxed too.
Currently, our tax system is based on tax brackets. That percentage would then fluctuate annually based. Four conservative tax plans with equivalent economic. At least read the book before making up your mind based on opinions by. The only way to update is by calling adam yomtov 9176893931 mobile. While permitting no exemptions, the fairtax hr25 provides a monthly, universal prebate to ensure that each family unit. The plan replaces them with a federal retail sales tax of 23% to be administered by state sales tax authorities. Can a national sales tax replace income taxes in the u. In other words, the distinction between a wage tax and a consumption tax based on treatment of old capital may mislead an observer. It will definitely fail in karl marxs goals of punishing achievement and discouraging personal savings.
We would enact what looks like a consumption tax, but what really is a wage tax, by forgiving the tax on old capital and vice versa. Moreover, even fairtax critics like gale agree that consumption taxes increase the size of the economy. Third, older households tend to have more assets than younger ones, so taxing existing capital places heavier burdens on older generations. The fairtax is a revenueneutral consumption tax in the form of a national retail sales tax on all new goods and services that is designed to replace most federal taxes. Every economist who modeled reported that the consumption tax would increase longterm economic growth.
Valueadded tax consumption tax a tax only on income that one spends on goods and services. Gales calculations show that the fair tax would cause taxes to rise for 90% of all households, and only those in the highest 10% of incomes would get a tax cut. Boortzs book coauthored by georgia congressman john linder entitled. There is still no such thing as a fair tax mises institute. Of course if you are in search of a socialist utopia, the fair tax is not what you seek. These are perfectly valid reasons to favor the fairtax or any other consumption based tax system. The fairtax book is a quick read i read the whole thing in a single day, most of it in one sitting. By way of contrast, most states that have sales taxes have roughly a 50 percent tax base. Could income tax be replaced by a consumptionbased sales tax. Boortz himself even acknowledges this in his newest book on the fairtax. Municipal governments in florida are also allowed to collect a localoption sales tax that ranges from 0% to 2. We also take the 50% book profit as well i am not sure but have been asked the question.
The joint committee invited economists of many economic stripes to model what would happen if america switched from the current code to a unified income tax or a consumption tax. Treasury department official, who has said the fair tax would shift the countrys tax burden from the wealthy to the poor source. Fairtax was a flat tax proposal in 2005, 2008 and 2009 in the united states that includes. Its set at 5% never to be increased, collected by the states for a fee to be determined then sent to the u. It also says incomebased systems discourage savings and investment, which means slower capital accumulation, lower productivity, and therefore slower economic growth. A consumption tax is a tax on the purchase of a good or service. Since gst is a destinationbased tax, all the sgst on the final product will be collected by the state in which it is consumed. Ksfairtax the conclusion of the republican tax plan. But there is a lot of information crammed in there.
Wherever the horse moves, the rider moves along with. The fairtax proposal assumes a 100 percent tax base on consumption. Consumption taxes can take the form of sales taxes, tariffs, excise, and other taxes on consumed goods and services. A common example of a consumption tax is a sales tax. The third section examines the macroeconomic effects of adopting a consumption tax. This bill is a tax reform proposal that imposes a national sales tax on the use or consumption in the united states of taxable property or services in lieu of the current income and corporate income tax, employment and selfemployment taxes, and estate and gift taxes. It is important to note that the rate is calculated on a taxinclusive basis. Purchase of living essentials taxfree via the prebate under the fairtax, all americans consume what they see as their necessities of life free of tax. Congress has the power to design a tax system to fund the necessary functions of government. After reading this book, i have decided that the fairtax may be the best alternative.
The potential financial gains for residents are exciting. In 2005, firebrand radio talk show host neal boortz and georgia congressman john linder created the fairtax book, presenting the american public with a bold new plan designed to eliminate federal taxes and the irs, jumpstart the u. Tax experts bob carroll and alan viard are trying to rectify that with their new book, progressive consumption taxation. The fair tax rate is 23% charged on all consumption. Factcheck called the presentation misleading, saying that it hides the real truth of the tax rate. Valueadded taxation is based on taxpayers consumption rather than their income. The fair tax has an effectively builtin tariff that, instead of raising taxes on imports, which would be illegal under the world trade organization rules, instead eliminates taxes on our manufacturers, allowing them to lower their prices an estimated. Americans for fair taxation is a 501c4 nonprofit, nonpartisan grassroots organization solely dedicated to replacing the current income tax system with a fair, simple and transparent national consumption tax the fairtax plan. The fair tax is a consumption tax, and the estate proceeds are income, not to be taxed.
The hallrabushka flat tax was proposed by economists robert hall and alvin rabushka in their 1985 book the flat tax. The flat tax is not flat and the fairtax is not fair. The fair tax book explains this revolutionary plan in plain english and does something even more amazing. The maximum local tax rate allowed by florida law is 1. Value added tax the value added of a firm is the difference between. Rather, congress should implement a consumptionbased tax system to replace the current, broken system.1416 381 1530 1618 1266 935 1512 826 1097 823 91 1116 649 696 869 1455 828 558 1551 567 449 92 620 352 1315 192 737 265 729 1332 869 710 1375 17