I've been reading lately and came across the notion of 'fairtax', a complete re-working of the US tax system, and I think I like the idea.
To summarize it:
All current taxes are repealed, replaced by a national sales tax.
That sales tax applies to all retail purchases, from a new house to a bottle of water.
It does not, however, apply to used items, or non-retail sales: every item is taxed only once- when it is first purchased.
1- Simpler. 160 pages of new tax code would replace the several-million word (and growing) current tax code.
1a- Simpler code means fewer loopholes: less tax fraud, and fraud is easier to detect and prosecute.
1b- Companies spend less time deciding what to do based on tax consequences, and instead choose the best action.
1c- Companies and individuals spend less time, money, and productivity on preparing their taxes, saving hundreds of billions of dollars throughout the economy. (Those billions go back into the economy, making it stronger.)
2- Globalization, and bringing expatriate money back in.
2a- Currently, all exports have a 'tax burden' (approx 22%) added in, because of the taxes the manufacturers pay. Under fairtax, it would be near 0%, so American companies could afford to sell things 22% cheaper overseas.
2b- Most of the money stored in offshore accounts is stored there to avoid taxes. Most of it will come back to 'stimulate the economy' once that motivation is taken away.
2c- Likewise, many corporations have moved their headquarters out of the country to dodge taxes. With those taxes removed, they can move back, bringing jobs with them.
2d- Foreign companies will notice the new 22% edge American companies have. Soon, they'll be moving out of their own countries, outsourcing here to be able to make tax-free money. Again, creating jobs and growing our economy.
3- Wider tax base. The wider the tax base, the less each individual has to pay.
3a- The 'black' and 'grey' and 'underground' economies will all be taxed. Drug dealers, prostitutes, and all manner of criminals don't pay income taxes. They will, however, pay sales taxes whenever they spend that illegally obtained money.
3b- The super-rich, the ones who mainly live off of investments, and manage to get those tax-free... They'll pay taxes too, whenever they buy anything. As it is now, they barely pay any taxes at all.
4- Visibility and equality.
4a- People will know how much taxes they pay every time they buy something... instead of being mostly clueless as they are now. Awareness of taxes is the first step towards people demanding en masse that the government be more responsible with their money.
4b- No exclusions. No industries will get a golden ticket tax break to make them more profitable than others. Not food, not health care, and certainly not government industries.
4c- Everyone pays the same taxes, and pays them voluntarily, by buying things. Hence the 'fair' in fairtax.
5- Encourages saving and investment. Money that you put into savings or invest is not taxed at all, until you finally decide to spend it.
6- No more IRS. The IRS is a corrupt organization, universally hated, and often tramples individual rights... Nobody will be sad to see it go.
7- Encourages charity: Money that you give to a charity will never be taxed. This happens automatically, instead of having to fill out forms to claim a deduction.
Regressive. Puts more of a burden on the poor than on the rich.
Solution: Everybody will get a monthly check from the government... everybody. This check is equal to the amount of sales tax you would pay if you were spending every penny of a poverty-level income. This means that nobody will pay taxes on the basic necessities of life. Families below the poverty level will actually get more from the government than they pay. Families slightly above the poverty level will pay a very small amount of taxes, assuming they don't save any money. The rich get the exact same tax 'prebate' the poor get, but to a rich family, that amount of money doesn't make much difference. This is also what makes the tax voluntary: you only pay taxes if you spend money beyond just the necessities of life.
Makes everyday products more expensive.
Solution: 1) They won't be quite as expensive as you might think. Since the companies making the products won't be taxed, their pre-tax price will be cheaper. 2) From not paying other taxes, and from the growth it causes in the economy, you'll have more money to pay those higher prices with. 3) you'll get the 'prebate' money monthly, which will help offset the higher prices. The less you spend (the poor spend less), the more this prebate money helps you.
High percentage taken from every sale.
Estimates of what the percentage would be vary from 23% to 39%. I think a reasonable estimate is 30%. This is a lot, but remember the solution for the previous problem. For all the advantages it brings, including the cessation of all other taxes, I think it is worth that price. Since most products will see a 22% reduction in pre-tax price, there will actually only be an increase of 1% to 17% in prices you pay, depending on which estimate you use.
A 'gift' to corrupt corporations.
Solution: Corporations don't pay taxes today, really. They pass them down. Eventually, any tax money taken from a corporation will come out of an individual's pocket. I doubt that the CEO's pockets are touched by it very often though. At first, the corporations will try to keep pre-tax prices at their current level, but soon, some company will undersell them to gain an advantage, and they'll all have to follow suit or go out of business. Prices will have to come down, because no corporation can be competitive when charging 22% more than everybody else for no reason.
Besides, this will take away all the special loopholes that their bought-and-paid-for politicians have made for them in the tax code, leveling the playing field.
Difficult to implement.
Solution: Most states have a sales tax already. The only change would be stores re-configuring the sales tax percentage in their cash registers.
Tax industry employees lose jobs.
Solution: they can find jobs as productive members of society, instead of being a leech on a bloated system. These new jobs won't be hard to find, as the new global competitive edge helps American companies succeed, and draws foreign companies to move here.
How will X program get money when it used to be funded by its own tax?
Solution: all government programs will be funded through this one revenue source.
How would fairtax lower taxes for me?
Solution: It isn't intended to. The government will still collect the same amount of revenue. It is intended to be a better way to collect taxes, not a way to collect less taxes. Any tax reduction would be a completely separate effort, and would simply affect the percentage rate.
Converting to the new system will cost companies money.
Solution: A very small percentage (.0025%) of the money collected goes to businesses to help them deal with the new system.
Converting would mean that inventory in stock becomes very expensive.
Solution: In-stock inventory has already been taxed once, since it carries the burden of the old tax code. Companies would get a rebate equal to the tax rate x value of inventory on hand at the time of conversion. This means that we can keep the tenant of everything only being taxed once.
So, what do you think of the fairtax?
Personally, if I was given the authority to change just one thing in the US, this is what it would be.
Mod note: Not a copy-paste job; this is my own summary.
I've been in sales tax systems in two countries, and both had to have exceptions for a number of items in order to provide for the poor. For example, basic staple foods such as basic white bread and brown bread, milk, cheese etc had no added tax. Ditto vegetables and fruits. The sales tax however was in addition to general taxes. In Canada they had a very good tax system, but problem is, like "Animal Farm", they started with a good system, and then added on all kinds of additional taxes which made it more complicated. While there is greed and people wanting to make money and avoid taxes legally as much as they can, the tax system will never be simple. Simplicity will have to start with the economic system first. It has to be so transparent that people can figure out how it works, and until they can do that, and need accountants to help them with their taxes, a sales tax system will never be simple. It will always be as complicated as the economic system it is operating in.
Probably not quite like this one.
There's two big differences you mention yourself:
The fairtax uses the prebate for that. Basic necessities are not taxed because the money that would be taken for the tax has already been given back. Instead of a complicated code to decide just what the basic necessities are (and you know every corporation in the country will be pushing its products as being necessities), you just allow the people themselves to decide what to spend their tax-free portion of money on. (Simplicity at work yet again...)
(Which negates most of the advantages of using it, while keeping most of the disadvantages.)
Why can't it be simple? Who was it who said 'simplicity is the mark of genius'?
The real reason it becomes complicated is that politicians are bribed to add exceptions to it for their sponsor corporations... And when they aren't being bribed, they're using the tax code to push whatever social agenda they fancy.
If the same percentage is taken out of all sales, how can loopholes develop? Adding in any at all -- for any purpose -- would be a major break from the purpose of the system.
The first loophole that was added in would violate two main principles: simplicity and fairness.
Spending more than it receives can be simply fixed by adjusting the percentage rate. A better, though more difficult, solution is to lower spending. (One obvious place to cut spending would be the no-longer-needed IRS.)
What about charity schemes? How would people be rewarded tax wise when they are contributing to charity?
Simple... How much would a poor family spend on taxes? (Poverty level) x (sales tax percentage), of course.
We'll just give them that money before the taxes are ever taken out.
Everybody would get this same check in the mail, which covers the taxes on basic necessities, which means nobody pays taxes on the basic necessities of life.
Therefore, people at the poverty level pay no taxes at all, even if they spend every dime they earn. People below the poverty level actually get more money than they spend on taxes. People just above the poverty level pay a very small amount of taxes. The rich pay taxes on almost everything.
Giving the 'prebate' like this removes the need to give certain products exceptions. As soon as you start deciding which products are 'necessities of life', every company in the country (and a lot outside of it) will be promoting how their products are absolutely necessary to live. By the time it all got sorted out, half the economy would be tax-exempt, leaving the other half with double taxes.
Money donated to charity is always 100% tax deducted! And you don't have to fill out forms for this either; it happens automatically because of the way the system works.
Money you earn is taxed only when you spend it. If you give it to charity, you don't spend it, do you?
Charitable organizations would continue having their tax-free status. In states that have sales tax, a charitable organization just has to present proof and a registration number to have the sales tax removed from any purchase. This policy would be adopted nationwide.
Let's suppose you're in one of the higher tax brackets in the US as it is now: they take 35% just for income taxes.
Are you going to donate $1,000 to charity in order to save $350 on taxes?
Of course not, you'd waste $650.
Likewise, in this system, if you spend your money, you would pay around 31%.
Are you going to give $1,000 to charity in order to avoid paying $310 in taxes on it?
Tax incentive is a reason for charitable giving... But anybody who passed 3rd grade math should be able to figure out that charitable giving for the sole reason of tax benefit is rather dimwitted.
It's a great way to reward charitable giving, but it would only be profitable in a system that taxed more than 100% of your money away.
Do they get to deduct more than 100% of what they give to charity from their tax payment?
In the US, charitable deductions are taken out of taxable income, which means you have to pay taxes on that reduced amount of income. Therefore, your return on charity donations is equal to the income tax rate you pay.
It has been estimated at a $306 billion industry in the US, and that doesn't count the lobbyists in Washington who make million dollar salaries trying to influence the way new tax code is written.
For every $3 paid in taxes, $1 is paid on tax form preparation, due to the complexity of the rules.
Even after reading that, I still can't see how, say, donating CN$1,000 to a Canadian charity could save you more than CN$1,000 in taxes...
(And if it were possible to save more in taxes than you were donating, it would effectively be the government doing the donation, not the taxpayer.)
Interesting debate you two have going on. I am sure the United States government will put a national sales tax in place but it will be in addition to all the other taxes we pay not instead of. Considering what I spend, if that was their only of tax from me, they would be in deep trouble. I have more questions about how NST alone would work - off to do more reading.
I sure hope not...
That would negate most of the virtues of the fairtax system, and make the tax system as a whole even more complicated, rather than simpler.
If the Canadian system is like the US system, it's too complicated for anyone to know more than a small portion of the 'nitty gritty details'.
Oh, and if you call the IRS for help in figuring out how much you owe... They'll be wrong more than 50% of the time. Nobody understands it, not even the people who administrate it.
Let's have some fun with math, shall we?
Suppose you were to read 50 pages of it a day... A reasonable goal, given how complicated and obtuse the wording will be, you'll be very lucky if you manage to understand that in a day.
At that rate, you'd have to devote 3 years of your life to reading the tax code. By that time, of course, many changes will have been made.
But let's suppose you actually have to work to support yourself, and can only devote free time to studying the tax code. Say, 10 pages a day. Then, it would take you just 15 years to learn it. I'm sure the IRS would have no problem waiting 15 years for you to file your taxes; you don't want to file them without understanding the code, do you?
America should probably implement it for the simple reason that their present system is unconstitutional anyway.
It doesn't sound like a bad idea on paper. But whether or not it would work in practice is another matter. Ultimately it would depend on how widely it was embraced. Virtually any system depends on the support it receives. As is evidenced throughout history, even intrinsically broken systems can still function if they have the necessary support.