Wednesday, January 27, 2010

Taxing Alternatives?

The income tax dates back to the Han dynasty of China. It was used primarily to collect taxes from everyone in order to serve everyone. The income tax, while good for the government and it’s provided services, is not all it’s cracked up to be. Because of the way the American income tax system works, it often discourages savings and investments on the individual level and, on the corporate level, hinders the competitiveness of businesses and economic growth. With problems such as these, organizations such as FairTax surface, giving insight to the American people on new possible ways to provide services.
Instead of an income tax, the FairTax proposes one, visible, Federal sales tax, that would enable people to be taxed ONLY on what goods they choose to purchase, instead of how much they earn. The fair tax allows workers to keep their entire paychecks, enables retirees to keep their entire pensions, and among other things, allows American products to compete fairly. Another positive to the FairTax is that it’s transparent. While the current tax system involves over 60,000 pages, most people don’t actually know what’s included in it.
One of the largest positives for the FairTax is that it doesn’t tax investments. This means that the stock market would have a huge burden lifted off of it, allowing it to have a huge growth, creating many jobs. Another huge pro for the FairTax system, is that all people are taxed based on what they buy. Illegal dealers of drugs such as marijuana and heroin will be taxed on everything they buy whereas now (as they don’t pay an income tax on their illegal earnings), they’re simply rich. Illegal immigrants would also pay the same tax, which goes a great length to solving the illegal immigration problem.
As with anything, there are of course cons to the FairTax system. The FairTax system calls for an abolished income tax, meaning that the sales tax would have to “pick up” in a sense, all current government costs. The current bill in congress calls for a 30% sales tax, turning a $20,000 car into a $26,000 car. For people who have been saving under the current tax code, that would be a huge hit. The FairTax, during the first few stages, would decrease consumer spending, until the break from income taxes would outweigh the cons.
The FairTax is currently supported by five out of eight G.O.P. candidates and one Democratic candidate. The current taxing system does not encourage people to work, invest, or engage in entrepreneurial activities, while the FairTax plan would encourage all of these, causing a huge revenue gain. A full macroeconomic analysis of the proposed plan can be found at http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf.






REFERENCES:
1. http://en.wikipedia.org/wiki/Income_tax
2. http://www.fairtax.org/site/PageServer?pagename=about_main
3. http://geekpolitics.com/10-pros-and-cons-of-the-fair-tax/

7 comments:

  1. This seems like a very regressive tax. If I earn $20,000 I have to spend $20,000 and get taxed on 100% of my income. If earn $300,000 maybe I only really spend $50,000 and get to invest $250,000 scott free? Seems unfair to me.

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  2. I don't think I fully understand what you're saying. First of all, the "FairTax" calls for no income tax- so it wouldn't be 100%. This means that you would keep all that you earn. However, there would be a 30% sales tax on all taxable items. This would be harsh at first, but once the difference is made up, it will even out to around the same price. This gets rid of people who are rich simply off of illegal dealings, and also solves a lot of the immigration issues. Not only this, but this plan gives a LOT of incentive for people to make more money to spend on the things that they want.
    Again, I'm not sure what you're trying to say in your comment, but I hope I kind of answered it?...

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  3. I understand the premise and like the idea. I wonder what level the tax would have to take to reduce the current deficit by, say 10% per year.

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  4. Glad to see you answered my post! Wow. This blog thing really works LOL. What I'm saying is that if you make only $20,000 you have to spend it all. And every time you spend it you pay sales tax. So you pay 30% times 20,000 or $6000 in tax. Yikes!

    Meanwhile if you make $200,000 you may only spend $50,000 and save or invest the rest. So you pay sales tax when you spend. So: $50,000 * 30% or $15,000.

    It's a LOT easier for a $200K person to pay $15K than it is for a $20K person to pay $6K.

    Your proposal is highly regressive! Right now someone making $20K pays almost nothing (no sales tax on food) while someone making $200K pays upt to 35%. Under your system the poor person pays 30% and the rich guy pays only 8%!

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  5. That is a good point. I'm not exactly sure, but I imagine that the plan does take into account the lower class.

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  6. Good blog, it was well researched and thought out, but personally i dont agree with either choice. I personally think the only "Fair" tax is one flat tax, not matter how much you make, it just taxes your income at a flat rate, therefore the government gets what they need, and you can adjust to save your money based on what you make after taxes.

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  7. While I understand, and somewhat agree with the Fair Tax Proposal, I think 30pct across the board is perhaps too BIG a hit for the common folk. Perhaps something more progressive where Luxury Items take the 30pct hit and Clothes and shoes only 10. Also, since city and town governments also assess sales tax your 30pct could end up as a 34pct sales tax. This could actually hurt the economy in the long run. Perhaps FLAT TAX as advocated by Steve Forbes is something you could look into, with the "FAIR TAX" pricipal added to the "Luxury" Items. Ultimately uncomplicating the Tax system would be a major plus to either program.

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