C.C. in Houston writes to say there is nothing fair about the Fair Tax plan for a single flat sales tax. He quotes a letter from another concerned citizen to the editor of the Houston Chronicle.
"The so-called Fair Tax scheme is a blatant attempt by the wealthy to reduce their tax payments. I call it the 'unfair tax,' as it will tax consumption rather than income. Those in the lower- to middle-income brackets usually spend most all of their income on necessities and can't save. They would be taxed on practically 100 percent of their income. Retirees, whose income may require them to pay no taxes, would end up paying taxes on all of the money they spend, which would greatly reduce their purchasing power.
"On the other hand, those who make more than they spend, and indeed those whose incomes greatly exceed their expenditures, would pay taxes on significantly less of their incomes, proportionally. What's fair about that? In fact it is a total reversal of the graduated tax system that we now have where we pay taxes based on our ability to pay. Our current system is certainly flawed and needs major overhauling, but it is still the fairest method of taxation.
"Let's fix the system we have rather than shifting the tax burden to lower-income Americans."
I've heard this argument before. It doesn't hold water. I believe that junking the current tax system -- in its entirety -- would create a modestly graduated tax system with a very broad base, consumption. By replacing both the income tax and the employment tax (among others) with a single sales tax, we would accomplish these good things:
- Eliminate the fastest-growing and most regressive tax in our lifetime -- the employment tax.
- Massively broaden the tax base from only some income to all consumption.
- Eliminate the corporate income tax and the entrenched corrupting lobbies that it has engendered.
- Make visible, for the first time, the size of our collective tax burden.
- Save the incredible amount of time and money wasted on tax planning and scheming.
- Create a path for dealing with the unfunded liabilities of Social Security by increasing the tax base that supports it.
- End the biannual festival of finger-pointing and envy that has become the hallmark of every election cycle.
- Remove the embedded expense wedge that reduces the competitive position of American-made goods.
The Fair Tax proposal calls for giving all households a "pre-bate" of what they would pay in sales taxes for the necessities of life. The pre-bate would be paid to households monthly, eliminating the burden of taxes on our poorest families. Because of the pre-bate, the new tax would amount to a graduated tax.
The argument that poor people save little and rich people save much is a red herring because it ignores two realities. First, the only benefit from having money is what we can consume with it. If you earn money that is not spent, you are deriving no immediate benefit from the money and shouldn't pay taxes on it. As long as the money not spent is used in our economy, it is providing benefits to everyone in the form of new investment, new jobs and working capital.
Second, many people who are rich or well-off spend more than their income on consumption because they are spending a portion of their capital. Some of that capital would not be taxed at all in the current system. The portion that was capital gain would be taxed at only 15 percent. With the Fair Tax, the very rich would pay taxes on all consumption. This includes mega yachts, wine cellars, and much other consumption that is taxed lightly or not at all. Instead, they would pay at the higher sales tax rate.
Right now our entire tax system is stacked against the young. The burden is getting worse, not better. It is possible that some older people would pay more in taxes than they do under the current system. That would only happen, however, if they had significant assets that they spent on consumption.
In that case, the sales tax would be highly progressive. It would tax those with assets that were used for consumption. It would not tax those who had no assets to use for consumption.
The only people who should fear the Fair Tax are the politicians, of both parties, who would lose their tools for extortion.
Most public polls show that more than 50 percent of the voting public -- left, right and middle -- favor a radical reform of our tax system.
So let's take a poll. Go to our forums and discuss it with the community
ON THE WEB
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.