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FairTax: The Myths In 2008, with the objective of combating these myths, Neal Boortz and John Linder fired back with the writing of a sequel, FairTax: The Truth. As we strive to inform with fact, we also want you to be aware of the myths, so here, we will present you with many of the myths discussed in the book, provide updates of those myths where available, as well as present other myths not included in the book. |
23% is Too High -
At a point, people simply will not be willing to pay sales tax, and The FairTax, at 23%, is way beyond this level. This is a myth because of basic economic, not to mention common sense. If the price of something is the same or slightly increased, yet you have more money to spend on that item, the odds are you will be more likely to purchase it. Let's look at this in practice. In times of economic growth, consumer spending is increased because money is available (whether or not buying on credit is a good thing is not a topic that will be discussed here). Then, during times of recession, when belts are tighter, spending greatly decreases, as we are currently being reminded of by the media every day. Under The FairTax, prices will remain where there currently are, if not decrease in some sectors, and this is with the 23% FairTax included. The American Consumer, however, will have every dime of their paycheck to spend, as well as the monthly prebate. What would you do?
Decreasing Revenue -
Under the FairTax, revenue to the Government would decrease. This is one of my favorite myths to combat because it is so easy to do so! Under our current system, we have almost reached a point where for every person who pays taxes, there is one who does not. Additionally, companies pay taxes, and numerous other taxes and fees provide revenue to the federal government. Needless to say, the compliance cost of several hundred billion dollars and enough man hours to equal several hundred people's full lives cuts into this figure, so it is by no means at its optimal potential. Under The FairTax, all of these different sources of taxation disappear, as well as their compliance costs. In replacement, all retail purchases above the poverty level are taxed. Why is this important? For those above the poverty level who pay no taxes, they will now be paying taxes. For criminals who pay no taxes, they will now pay taxes. For visitors to this country who pay no taxes, they will now pay taxes, and the list goes on and on. The bottom line is the modest tax base of companies and half the individuals in this country would greatly expand to include anyone who makes retail purchases above the poverty level as well as others who have never paid into our system but received all of its benefits (I will not get into illegal immigration here). The problem, however, is that this makes too much sense for our politicians to understand...
VAT vs The FairTax -
A Value-Added Tax (VAT) would be preferable to The FairTax. This is a myth because a VAT would do nothing more than add additional levels of taxation to the ones we already have. A VAT works by taxing a product every time value is added to it. Think of the production of a vehicle. The frame is built. TAX ADDED. Wheels are added. TAX ADDED. An engine is added. TAX ADDED. The rest of the vehicle is assembled. TAX ADDED, TAX ADDED, TAX ADDED... I think you get the point (think of a cash register ringing). Additionally, think about the components that are added to the vehicle. In many cases, they are manufactured elsewhere, so they go through the same process of taxation on their own. Imagine this cumulative effect... Finally, a VAT would be horrible because no politician proposes to enact it in order to replace the current income tax system. Instead, they propose for the VAT to supplement it! Now that is scary...
Retail Transactions -
Under The FairTax, everything a consumer buys is taxed at the 23% rate. This is a myth because The FairTax is only applied at the retail level, thus anything that is bought used is not subject to the tax. Yes, this includes both used cars and homes! Services are taxed, however, because they are a good that is consumed on purchase, thus by definition, are a retail item. Once again, a very important thing to note here is the monthly prebate every American would receive under The FairTax. Because the retail goods required to run a household are taxed at the retail level, a mechanism must be put into place to ensure The FairTax does not adversely affect the poor. This is accomplished via the prebate, which is a payment received every month to compensate for taxes paid on household items up to the poverty level, and it would be based on a household's size.
Charitable Contributions -
Passage of The FairTax would cause charitable contributions to disappear because there would no longer be a tax deduction for them. Like the home interest deduction, if there is no income tax, deductions would not be necessary; however, it is a myth that this would cause charitable contributions to be a thing of the past. With the tax system we currently have, you do not get a $1 tax refund for every $1 you give to charity. It only affects your taxable income, thus you only get a small percentage back through a lower tax bill. Additionally, there is a limit to this based on your income; however, people still give to charity, even the "evil rich" who cannot deduct any of it. Why is this the case? Simple... We are a charitable people. Our country has been more blessed than any in history, and with that comes the responsibility to help our fellow man. The numbers do not lie; charity is alive and well in our country and will continue to be when The FairTax is passed.
23% or 30%? -
The FairTax rate would actually be more like 30%. This is a myth because the 30% figure used by opponents of The FairTax is based on calculating The FairTax as an exclusive tax; however, The FairTax is actually designed to be an inclusive tax. To explain, let's look at an easy example: You buy an item at the store for $100. That is the total price you pay at the time of purchase, and it includes $23 in tax, The FairTax. Thus, 23/100 = 23%. Opponents of The FairTax calculate this same purchase in the following manner: Within the $100 purchase, the tax paid was $23, and the price of the item was $77. Thus, 23/77 = 29.87%. I hope from this simple example you can see that numbers can be manipulated; however, I am not asking you to believe good things you hear about The FairTax, either, but instead, to study and learn about it on your own and see it based on its true merits of how it would apply to YOU.
Mortgage Interest Deduction -
Under The FairTax, there will be no tax deduction for home mortgage interest, thus the average taxpayer will be forced to pay higher taxes. This is a myth because, if there is no income tax, there is no need for a deduction in the first place. Like many aspects of the federal tax code, politicians will no longer be able to tinker with it in order to accomplish their own political ends.
"Corporate Greed" -
If The FairTax is passed and the embedded taxes in the goods and services we purchase are no longer a component of the price, corporate greed will still cause prices to remain the same, thus we will pay 23% more for those same goods and services. This is a myth because the vote of a potential customer's wallet still remains the supreme power in corporate America. Competition would ensure prices decreased to their proper levels, and if one company attempted to keep their prices up, another company would jump at the chance to steal customers by offering a lower price. Take a look at fast food today... How many different food items can you purchase for only $1 each? This is the beauty of our free market system, and it will certainly prove this myth to truly be a myth once The FairTax is reality.
Cheating Under The FairTax -
It would be easier to cheat the system under The FairTax. This is a myth because, under The FairTax, it would take two people, working in concert, to cheat the system, not just one. Under our current system, all one has to do to cheat the system is lie or make a mistake. This could be by under reporting business income, claiming too many exemptions or an extra dependent, or even, not reporting anything at all. Unless you have the income to be on the radar of the IRS, the chances of getting caught are under 1%. Under The FairTax, however, you must be willing to cheat the system, and you must find someone in the retail sector willing to cheat it with you. The odds of this? Not likely...
The Poor -
The FairTax would adversely affect the poor. This is a myth because The FairTax would actually enable the poor more than anything we have yet to experience in this country. Though 47% of Americans do not pay income taxes, they still pay payroll taxes of 7.65% (if an employee) or 15.3% (if working for themselves); that is, unless they are cheating the system. This means they are not taking home every cent of every paycheck. Additionally, they are paying higher prices for all goods they purchase because of embedded taxes in those goods. You don't really think a business isn't going to pass their tax burden on to you, do you? You are paying their fair share. The FairTax would change this because every person would get every cent of every paycheck. They would then get to choose how much tax they pay by choosing how much to purchase at the retail level. Anything not purchased at the retail level would not be taxed. What about groceries you ask? Though on the retail level, groceries would not be taxed because every person would receive a monthly prebate amounting to the tax on items required to live up to the poverty level for that household's size.
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