The fair tax: is it right for America?

Recently there have been different budget proposals to address the growing debt of our country and to make changes in the way government operates financially at all levels. One of the changes in budget proposals identifies the need to reform our tax system. It is without question that there will be some changes in our current tax system, but what those changes will be is yet to be decided. Decisions made regarding our tax structure and the manner in which government will operate in the future must be based on sound principles and accurate information.

There are two different pieces of legislation in each Congressional house (Senate & House of Representatives) that suggest changes to the U.S. tax structure. Each one has the words “fair tax act” in their titles. Two of the proposals have the same basic objective, while the other two approach the subject differently. I do not propose to know all the answers, or if such a system is right, but the current complexity of our tax system needs to be changed. Any system or changes to a critical aspect of our economy such as our tax system will have both negative and positive impact, and this is normal. Below are some aspects of each of the pieces of legislation now being considered.

One of the House of Representatives bills is titled Fair and Simple Tax Act of 2011 (H.R. 99) while its counterpart in the Senate is titled Comprehensive and Fair Tax Reform Act (S7). The other two bills, one in the House of Representatives (H.R. 25) and the other in the Senate are both titled The Fair Tax Act of 2011(S13). The summary for H.R. 25 an S13 is exactly the same which is unusual. The objective for these appears to be the same in both cases, but how the details of these will emerge is yet to be seen.

It is important to identify the objectives of the first two pieces of legislation before addressing the details of the Fair Tax Act. The Comprehensive and Fair Tax Act wants to accomplish four (4) things. One is to simplify and shrink the tax code to reduce the burden on taxpayers and businesses. Another is to eliminate wasteful tax breaks for special interests and remove corporate tax loopholes. The third objective is to get rid of extra tax breaks for millionaires and the last is to crack down on cheaters and close the tax gap.

The Comprehensive and Fair Tax Act (S7) has nine (9) objectives. The first objective is basically to establish an alternative income tax rate system with just three tax brackets (10, 15 and 30%). The second is to repeal the estate and gift tax which I feel is a good objective. The third objective is to adjust the increased alternative minimum tax (AMT) exemption amounts for inflation after 2011and make them permanent. Another objective is to reduce the corporate tax rate to a maximum of 25%. The fifth objective is to reduce the maximum tax rate on capital gains to 10%. The objective to allow an adjustment to the basis of capital assets for purposes of determining gain or loss is the sixth objective. The seventh objective involves establishing new tax-exempt accounts for retirement savings, lifetime savings and lifetime skills accounts. Exempting individuals under the age of 65 who do not have employer health insurance from the adjusted gross income threshold for the medical care tax deduction is the eighth objective. The last and final objective is to make permanent the tax credit for increasing research activities. This also includes repealing the terminating dates associated with the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The current legislation titled The Fair Tax Act of 2011 includes HR 25 and Senate S13, and has a long list of objectives which is too involved to specifically identify in this article, although various aspects will be discussed in this article. To begin, coverage of the current Fair Tax Act of 2011 proposal in Congress has seen attention but whether that coverage presents an accurate picture of the objectives is left to each individual to decide. One of the purposes of this article is to present the facts as they currently are and what it would mean for our country and us as individuals if such a system were implemented. Some say that to create a fair tax system, a constitutional amendment would be necessary to change the current income tax system ratified through the 16^th amendment to the U.S. Constitution. While I am not a constitutional expert on what it takes to abolish an amendment to the Constitution, I believe it is not a simple or easy process. The issue of whether passing legislation to abolish a Constitutional Amendment will be needed, must be answered in our court system.

I am not proposing adopting or rejecting this piece of legislation or others, but it is one which must be carefully weighed as to the positive and negative results and implications. The basic premise is to eliminate income taxes, payroll taxes, estate taxes and gift taxes among others and replacing them with a fair tax system which addresses gathering the income the government needs to function. While this may appear to be a good thing, the consequences of taking such action must be carefully weighed. There are various benefits, as well as deficits from a fair tax system. The facts vary from one site to another, but in the subsequent paragraphs are examples of support and non support for a fair tax system.

One point to consider is the benefits of a fair tax system in relation to the negatives of our present system. These are specifically identified within the current House legislation. Below are some specifics as written into the House version of the Fair Tax Act of 2011. The first argument to consider is the effect of a national sales tax. Features presented as benefits of such a system are:

It is similar in many respects to the sales and use taxes in place in 45 of the 50 states
It will promote savings and investment
It will promote fairness
It will promote economic growth
It will raise the standard of living
It will increase investment
It will enhance productivity and international competitiveness
It will reduce administrative burdens on the American taxpayer
It will improve upward social mobility
It will respect the privacy interests and civil rights of taxpayers.

The above opinions are specifically identified in the House version of the bill and clearly point to the objectives incorporated within their version. The House version also clearly identifies some negatives of the current tax system which point to the fact that it needs to be changed. The entire list of negatives of the present system will not be identified but critical aspects which have a bearing on our current and future economic security will be noted.

It imposes unacceptable and unnecessary administrative and compliance costs on individual and business taxpayers. Currently businesses must have dedicated staff with knowledge about the tax system in an effort to comply with the current requirements and any future changes.
It impedes the international competitiveness of United States industry, reduces savings and investment in the United States by taxing income multiple times.
With regards to payroll taxes it raises the cost of employment.
With regards to Federal Estate and Gift taxes it fosters the continued dominance of large enterprises over small family owned companies and farms.

While the list above is not a complete one, they do identify the basic objectives of legislation now in place to address changes in our current tax system. The positive side of a fair tax system is that it is simpler and easier to understand. Today we pay the taxes businesses must pay through the price of their goods and services. When the cost of doing business becomes less then prices will ultimately fall. Some may say that this may not necessarily occur in a fair tax system, but competition would play a part in making this happen. If the same product is available by a company who reduces the price based on his reduced costs and another does not, people will look at who is providing the best deal knowing that the cost of doing business has been reduced in a fair tax system.

Today, when people work overtime, more money is taken out of that overtime to pay more tax. Under a fair tax system employees would be able to keep the extra money that they earn and thereby have more money in their pockets. It would encourage more productivity and would provide incentive for earning more money. Presently, people are penalized when they earn more because their taxes increase. The more they make, the more taxes are taken from their paychecks. This is defined by the tax brackets that now exist. When people have more money as they would under a fair tax system it would encourage more savings, thereby providing more resources for banks to lend money to businesses and individuals who need it. It would also provide more available cash for individuals and businesses to purchase more goods and services.

Granted, under the fair tax system there probably would be some exceptions on goods that would be exempted from the sales tax. One example of this would be food purchases. Food is a necessity and thereby would or should be exempted. This would also have a potential impact on reducing food costs as they continually seem to rise.

There are negative aspects of the fair tax system. One key point made is the unpredictability of revenue which a fair tax system would generate. This aspect is no different than our present system. Currently there are predictions on everything about the economy and how much revenue the government will receive. Sometimes the revenue is greater than expected and sometimes it is less. The key is to create an environment in which business can flourish. Creating a simple tax system will reduce the cost of business, potentially reduce the cost of products and services and when prices go down consumers typically spend. The fair tax proposal is a consumption tax or sales tax. Most states currently have a sales tax system which would collect the sales taxes from businesses in their respective states. Therefore a national sales tax would not create additional work or increase the cost of government as a process is already in place.

The creation of a fair tax system will not eliminate all government regulations and in this respect accountants and attorneys are still going to be in demand. With regard to human resource jobs, all businesses have a human resource department that manages the hiring and firing of individuals for their business.

Some of the language in the present bills do allow for some exceptions of certain products and services. For the most part it appears that necessities such as food would be exempted. The key to any legislation directing actions such as the fair tax is the language created to implement it.

The fair tax proposal language in Congress is not finalized but the status and the details can be tracked through access to the senate and House of Representatives web site: (www.senate.gov and www.house.gov). Other sites which offer information are www.govtrack.us and www.fairtax.org. Additional links to specific legislation associated with taxes can be found at the end of this article.

Any tax proposal to reduce the amount of taxes individuals and businesses spend must be heavily considered and the impact of the changes must also be weighed. With any change there will be a period of transition and positive and negative impact. Creating a simpler tax system, whether it is a fair tax or something else is urgently needed. Many Americans dread April 15 each year. Any effort to reduce the cost of doing business and putting more money in the hands of consumers is a good thing. Some money will be saved and some will be spent. Both events provide benefit to the economy. Money saved gives banks more resources to provide loans to consumers and businesses. Money spent increases the business activity and can create jobs which again adds additional funds that can be spent or saved.

Overhauling our present tax system is not an easy task but it needs to be accomplished. Americans need this to happen during this legislative session of Congress. There are going to be exceptions as indicated in the present language of the bills in Congress and these may be subject to interpretation. Current tax preparers may be of use to help understand any new tax system generated. Congressional legislation examples of the past have proven that the language used is not in terms for the average individual to understand them.

This article is somewhat long but it is a major topic of discussion. The letters of the tea party movement represent Taxed Enough Already. Individuals and businesses must have their tax burden reduced and in so doing economic activity will increase and America and the world would be better for it. Reducing the cost of business and putting more money in the hands of individuals ultimately leads to more economic activity which secures jobs and allows our businesses to better compete in the world economy. The information and links I have given provides a means to understand the fair tax system as it is currently defined in Congressional legislation. I applaud those who have initiated the process of developing legislation to make a fair tax system become law. There is always going to be a need for someone at the federal level to manage and monitor any tax revenues received, and it is a matter of refocusing the IRS not eliminating them.

I currently see only one problem with developing a fair tax system, and that is the 16^th amendment to the Constitution. Again I am not a constitutional expert, but the language in the 16^th amendment states that Congress has the power to lay and collect taxes on income, from whatever source derived without apportionment among the states, and without regard to any census or enumeration. I feel this leaves the door open for the generation of the national sales tax through a fair tax system. In a manner of speaking, the more money one makes, the more they may spend and pay sales taxes. In this respect, the collection of sales or consumption taxes to fund the government activities is the source of which the 16^th amendment refers.

As discussed in this article, there are several legislative acts being proposed to address tax issues. Other legislative acts include H.R. 185 titled Permanent Tax Relief of 2011, S89 Withholding Tax Relief Act of 2011, H.R. 331 Fair Taxes for Seniors Act of 2011 and H.R. 86 End Tax Uncertainty Act of 2011. Links of these legislative actions now being processed in Congress can be found on the Senate or House or Representatives websites or on the www.govtrack.us website.