You Decide

KANSAS CITY, Mo. -- John Collet of Americans for Fair Taxation presented their ideas to a small crowd Tuesday, March 28 at UMKC in Kansas City, Mo. If this Houston-based organization had their way, the Internal Revenue Service would be a thing of the past and more high income taxpayers would pony up their fair share of taxes.

The FairTax replaces the income tax and all other federal taxes with a national consumption tax. The FairTax is levied only once, at the point of purchase on new goods and services.

The group admits it will be difficult for legislators to face down entrenched special interest groups, but they initially proposed replacing the current system with U.S. Senate bill S. 25 and U.S. House of Representatives bill H.R. 25. The next step would be to repeal the 16th Amendment to the constitution allowing the Federal government to levy an income tax.

Signatories to the original petition include noted academic economists and practitioners who feel the current tax code cannot simply be fixed. The current regs include 54,000 pages, approximately 2.8 million words of mind-numbing rules, exceptions and special interest loopholes. This tangled web would be replaced by a simple national sales tax similar to that paid to the county, city or, in the case of our own Hawthorne TDD, the subdivision.

But what about poor people? The FairTax provides every family with a rebate of the sales tax on spending up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The rebate is paid monthly in advance. It allows a family of four to spend $25,660 tax free each year. The rebate for a married couple with two children is $492 per month ($5,902 annually). Therefore, no family pays federal sales tax on essential goods and services and middle-class families are effectively exempted on a big part of their annual spending.

But what about the administrative burden of collecting the tax, now falling on the IRS? States can elect to collect the federal sales tax on behalf of the federal government in exchange for a fee of one-quarter of one percent of gross collections. Retail businesses collecting the tax also get the same administrative fee.

One of the biggest results of the Fair Tax would be to make it more difficult to evade taxes through shelters and other schemes. According to former IRS boss Charles Rossotti, people who actually pay taxes are cheated nearly $300 billion by those who do not pay all their taxes. This means we would enjoy a 20 percent decrease in what we have to pay if everyone paid their fair share.

Charities, which theoretically enjoy the benefits of our tax deduction for contributions, also would benefit under the FairTax. After the 1986 Tax Reform Act, charitable giving increased rather than decreased, despite lowering marginal income and transfer tax rates. Charitable giving rose by $6.4 billion, or 7.6 percent, in 1987 after the top tax rate fell from 50 to 28 percent (more than doubling the tax price of giving). The message is that increasing disposable incomes allows more giving, should citizens decide to do that.

Perhaps one of the worst drawbacks of the current tax system, with its preferences for certain industries and citizen expenditures, is that it distorts the price system of allocating resources to an activity. By removing the twisted incentives of the tax code, the FairTax people hope to accomplish a better use of resources.

Many citizens support the FairTax idea, too. Although many people who would favor such a system look at it from the perspective of making paying taxes simpler, that also represents a huge savings in national resources. If people are not forced to support a massive army of accountants to take care of their taxes, and instead use those resources for something else, the reallocation could potentially benefit all Americans and make our economy more competitive.

A tax every time you pay for your groceries also helps keep in front of taxpayers exactly how much they really pay in taxes. Seeing it come out of your pocket provides a rarely cited psychological advantage of causing people to bulk at every attempt to increase their taxes. Having taxes come out of a check when you never see the full amount makes it easier for Uncle Sam to pilfer your earnings.

(digitalBURG.com publisher Ben Pierce, CFA, signed the original FairTax petition letter along with approximately 75 other economists from locations throughout the country.)

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