Wednesday, October 03, 2007

The Fair Tax Book

The FairTax Book by Neal Boortz and John Linder

In this book, Boortz and Linder discuss the abolishment of the income tax. Under this system, wages would not be taxed at all. As an alternative to raise revenue for the government, they propose a national sales tax. The goal is revenue neutral so that same amount of revenue would be collected to run the government.

This would allow the individual to choose when they paid tax. So those who save and invest money rather than spending all of it, would come out much better.

The proposed sales tax rate would be around 23%. While this may sound high, one should keep in mind that no tax would have been withheld from his or her paycheck. For example, say that the average household income for America which is approximately $40,000 a year were not taxed. This would mean the Joneses get to take home all $40,000 of that hard earned income. As it stands today, they are probably only taking home around $32,000 assuming a 20% income tax rate and not considering state, Social Security, or Medicare taxes.

As a component of the national sales tax, they propose that a certain poverty level determination of say $10,000 which would be considered the bare minimum for a person to survive on and each person would receive a "prebate" of $2,300 per year paid in monthly installments. This would significantly help those on the low end of the income spectrum and actually result in additional money to spend on essentials such as food, clothing, and housing. It would also avoid the potential disparities which could occur with a food exemption if the wealthy purchased steak and lobster or other such expensive food items.

Additionally, it would take many of the inefficiencies out of the current system in that each time there is a touch on producing a good or service, income tax is charged. For example, when you buy a loaf of bread, the business who produced the seeds, the farmer who grew the wheat, the mill, the bakery, the trucking company, and the grocery store all pay income tax on their portion of the bread production. By taking the income tax away, the loaf of bread would subsequently be much cheaper (estimated around 25%) from the reduction of built in income tax for a product. (This assumes that businesses will not pay income tax. There would be many rules set up to prevent people setting up "businesses" to evade taxes.)

The Fair Tax also has the benefit of helping prevent tax evasion. Under the current system, there are millions upon millions of dollars of unreported income every year which are not taxed. This could occur in anything from illegal trades such as selling drugs on the street to the legal trades of wait staff or any industry in which cash is used to pay for goods or services but not reported. Every time these dollars were spent by the individuals, however, they would be taxed so this revenue which is currently lost would be collected.

It would additionally get rid of the estimated $265 billion spent annually to comply with the tax code. This is not to mention the 100s of thousands of hours that would be freed up to engage in more productive and enjoyable pursuits.

Economists estimate that in the first year of its implementation the economy would grow by 10.5%. Foreign companies would also have incentive to build factories in the U.S. to take advantage of the eliminated inherent cost included as mentioned in the bread example.

I think that this is a really great idea and hope that it is implemented one day. To learn more about it and see if your congressperson supports it or not, go to Now, go email your representatives and senators right now to voice your support. Do it. :-)

If you found this review helpful please let Amazon know at this link.

1 comment:

Ian said...

Wait! There's MORE!

Prices after FairTax passage would look similar to prices before FairTax - not "30% higher" as opponents contend - competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn't taxed under FairTax - thus lowering retail prices by 20% to 30%), or 23% of the "tax inclusive" price tag - this is the way INCOME TAX is figured (parts of the total dollar).

The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly "prebate" (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of HHS poverty-level data). A single person would receive a prebate of ~$200/mo. A family of four, ~$500/mo. - in addition to working members no longer having tax withholding confiscated from the fruits of their labor every two weeks.) Prof.'s Kotlikoff and Rapson (10/06) concluded,

"...the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

"Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax."

Further, per Jokischa and Kotlikoff (circa 2006?) ...

"...once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent."

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