The Flat Tax and FairTax are thought of by many civic-minded people. The Flat Tax will tax all income above $25,000 for singles and $30,000 for families of four or more at a rate of 15%. This rate would also apply to corporations.
The FairTax has a flat rate as well, but it does not apply to income. The FairTax proposes to levy a 23% inclusive tax on all goods and services, meaning that a cart of groceries today costing $77 before tax will cost $100 with the FairTax. Corporations would pay the same taxes as everyone else, just as the rich would.
With both of these tax plans appearing to have so many similarities, it is important to note some differences.
The Flat Tax Taxes Income While the FairTax Taxes Consumption
To clarify the biggest difference between these two plans, it is important to understand why it matters where taxes are levied.
When the government withholds taxes from one’s income, the person who earned it does not always receive the correct amount. Typically, they have more money withheld, resulting in a tax return. This means that the government receives the funds, spends them, and pays back anything they should not have had minus any interest. This is similar to a Ponzi Scheme, except Ponzi Schemes promise large gains and involvement is voluntary.
When income is not taxed, the person who worked for the money retains all of it initially. Since taxes are necessary for schools, roads, police and firemen, they need to be collected somewhere.
If taxes are levied during the buying of retail goods and services, and there is no income tax, the sales tax would have to be higher, but the idea is that higher rate would be paid for by people with more money, allowing them to decide when and where they pay taxes, and how much to the extent beyond their necessary living.
The FairTax Provides up to the Poverty Level While the Flat Tax Exempts Low Income Earners
To further assist taxpayers, the FairTax allows for a monthly consumption allowance, or “prebate,” based on the size of a household. This allowance covers the tax obligation up to the poverty level, meaning that if a single person was to buy goods and services up to the poverty level, she would spend a maximum of $10,400 a year. Under the FairTax, she would need $199 a month to cover these taxes, and would receive it at the beginning of each month.
A married couple with two children would be expected to provide for their family at no less than $28,000, bringing their yearly tax assistance under the FairTax to $6,440, or $537 a month. A family of nine would receive $882 every month.
The Flat Tax also assists all tax payers. While taxing income at 15%, a single person will not be taxed on the first $25,000 of his income. Families of four or more will not be taxed on the first $30,000.
To clarify, these amounts are post-deduction. So, if a family of five has two parents earning $50,000 a year, they would have had $7,500 withheld from their paychecks over 12 months. When they file their very simple 10-line income tax form, it will look something like this:
Deduction- 3 children
Deduction- $7,000 in mortgage interest
Deduction- $3,000 in medical and dental costs
Deduction- $5,000 in charitable giving
Taxable Income- $32,000
15% of Taxable Income- $300
Taxes Withheld- $7,500
Money Owed to Government- $0
Money Government Owes Family- $7,200
Both Plans Bring More to the Economy, but the FairTax has Higher Revenue Potential
With both of these plans, the economy is sure to rise due to the tax haven that the US will become to foreign and domestic businesses. The Flat Tax will collect 15% of corporate profits while the FairTax does not tax profit at all, only spending at 23% (the inclusive rate is used because income is currently taxed in this manner). The current system taxes profits, spending, property ownership, and payroll, among other things.
The US would attract businesses from Mexico and Canada whose current rates are 28% and 19.5% respectively.
While more workers are in the US, the tax base will increase under both plans. 15% of more income under the Flat Tax will be a larger stream of revenue for the government to operate with. However, the FairTax only taxes spending, meaning that anyone buying anything in the US will pay taxes to the US government. This will include the influx of people coming over to work from Mexico and Canada as well as those who claim no income, such as drug dealers and illegal immigrants.
This one point steers the favor into the corner of the FairTax. While the Flat Tax is very favorable compared to the current system, the FairTax has the potential to create more income for the nation while expanding its economy and offering a corporate tax rate that no other country can match.
Arguments Against the FairTax
The FairTax has been in Congress since 1999 when it was introduced by Georgia Representative John Linder (R). If implemented, taxes would be collected based on a 23% inclusive sales tax, meaning that $77 retail items would cost $100.
While the FairTax has many good points, it also has disadvantages, which include:
No proven track record
More jobs would be lost than under the Flat Tax
Tax rate could be adjusted
The FairTax has Never Been Implemented
According to The FairTax Book, the FairTax came about because several businessmen were so frustrated with how much of their time was wasted on the tax consequences of their decisions that they formed a group called Americans for Fair Taxation.
Their mission was to find the fairest means in which taxes could be collected by the government so that it would not mistreat any citizens, nor would it favor others. What came about was a system in which people and businesses chose what they paid by what they spent.
While corporations pay less in taxes, their earnings will increase and enrich the accounts of their investors, such as employees with 401(k) retirement accounts.
While this sounds very good, the idea has never been implemented, and, therefore, is just an idea. So, while if implemented it would make the United States a tax haven it cannot be proven with no basis other than the collection of ideas put together by Americans for Fair Taxation from research conducted at MIT, the Cato Institute, and Harvard University.
The FairTax Will Eliminate Almost all Taxes and Many Jobs
The IRS will be significantly reduced if not completely eliminated if the FairTax was to be put in place. While it is true that the institution will not be needed if this bill passes into law, it does not take away the fact that as many as 100,000 families would lose their primary source of income.
In addition to this, companies such as H&R Block would be out of business if they could not adjust their practice to a new area.
The FairTax Could be Adjusted After Passed Into Law
Another matter of concern is that the US history of taxation on income is not one that has always worked in favor of the people. In Robert Kiyosaki’s best-selling book, Rich Dad, Poor Dad, it is said that taxes were initially proposed as only being for the wealthy.
Since then it has led to all citizens paying taxes for earning, spending, and holding property. To complement those measures of collection, regressive systems, such as lotteries, have been enacted to raise more funds.
With the desire for more money, government officials can claim that they need the rate to be 25%, where $75 items cost $100, or that they need to “help the less fortunate” by creating a sales tax structure based on income, leading to a government organization solely for the monitoring of every Americans’ sales tax rate. Former IRS employees would be highly qualified.
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