Tuesday, November 1, 2011

A Better Fair Tax

Those of you who know me well know that I am a proponent of the Fair Tax, HR 25 as it has been introduced in the current Congress. In a nutshell, here is how it works:

  • Every household gets a 'prebate' equal to 23% of the cost of basic needs for a household of that size
  • Income is not taxed
  • Payroll is not taxed
  • You pay a 23% national sales tax on consumption of all new end user products
Essentially, you can tax people on either of two components, or both: productivity or consumption. Intuitively, if you tax someone on productivity, then you are telling them that working hard increases what they give to the government and decreases what they keep. I realize that's not quite right, but it feels that way. On the other hand, if you tax consumption, you are motivating people to be more productive so that they are able to consume more. That makes a lot of sense to me.

I promised you a better Fair Tax, but first I digress. Many, including some Republican presidential candidates, are espousing a flat tax. Flat taxes are regressive by nature. They place a burden on lower earners that the low-income segment of the population cannot afford to bear. And, a flat tax does not promote productivity.

However, ask an American today what the top priority for the country should be. While some will disagree, many will say that we need more American jobs. 

As I said, I like the Fair Tax. In their book on the subject, former Representative John Linder (R-GA) and radio talk show host Neal Boortz point out that CEOs of most large foreign-domiciled multinationals would move jobs and facilities to the US if the Fair Tax were implemented. [The current version of the Fair Tax is sponsored in the House by Rob Woodall (R-GA) who was formerly Mr. Linder's Chief of Staff.] Suppose we had a Fair Tax that did even a better job of promoting and developing US jobs.

Are you listening?

I haven't done the math to know what the right numbers are, but let's put the Fair Tax on a sliding scale. The technology to do this is available today. Here is how it would work (remember that my numbers are approximate as I have not vetted the math). If a product subject to the Fair Tax is manufactured entirely outside of the US (made in a foreign country with foreign components), the sales tax is 25%. If it is made entirely in the US with US components, the sales tax is 16%. For products that are partially American, there would be a sliding scale between 16% and 25%. 

This would motivate buyers to buy American which would, in turn, motivate producers to make American products. You're worried about all the jobs that have moved overseas, this would move a bunch of them back quickly.

And, again, to counter the critics, the Fair Tax is not regressive. For low income earners who buy only the necessities, they will pay no federal tax -- not income tax, not FICA tax, not sales tax. The higher earners will continue to have more disposable income, will spend more and will pay more tax. And, finally, the underground economy will be taxed. 

I'm not commenting here on the illegality of things like narcotics or prostitution, but the fact is that neither the group that peddles illegal drugs nor the group that earns in the prostitution industry currently pays their fair share of federal taxes. This would change that.

I think this truly is the better Fair Tax. Let's make it the law.

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