The Benefits of The Flat Tax Versus The Fair Tax

The Fair Tax has been created and adopted by a considerable chunk of the conservative movement, though if ever implemented, can very possibly prove to be a disaster.

Its supporters desire to abolish the payroll tax, the entire IRS, and the progressive income tax where each individual is taxed different rates based on the amount they earn. Abolishing these taxes requires creating an alternate venue from which the government will be able to make up the lost money, and thus the fair tax was created. The plan; instead of taxing one’s income, tax every single dollar spent whether for luxuries or basic purchases including rent, utilities, and health care. The fair tax would operate at a flat rate with its creators touting thirty percent as enough to replace the other taxes.When Warren Buffet falsely claimed that his secretary was paying more tax than he was, it was easy to provide a rebuttal and prove his statement was false since earners with higher incomes are placed in one tax bracket which has a higher tax rate than those with lower incomes. With the Fair Tax, however, Buffett’s currently false claim may very well become the norm. How? Let’s take Mr. Millionaire who earns one million dollars a year and compare him to Mr. Low Earner who earns twenty thousand dollars a year. Mr. Millionaire’s annual expenses add up to $100,000 dollars a year, spending only a tenth of his income. He is therefore taxed thirty percent but only on the ten percent he spent, which equals to thirty thousand dollars which is only three percent of his entire income.Although the rich spend more money than the poor, the larger one’s income the smaller percentage they actually spend. They also tend to spend considerable amount in areas which won’t be taxed under the Fair Tax such as business investments, building factories, etc. Surprisingly, of the 3.5 million millionaires in America, many are first generational millionaires who don’t drive luxurious carsor lead a frivolous lifestyle. As for those who do, they often vacation out of country, and will have an extra incentive to do so with the Fair Tax, since it will be tax-free.On the other hand, Mr. Low Earner earns twenty thousand bucks a year of which he spends fifteen thousand dollars or seventy five percent of his annual income on food, clothing, rent, and other expenses. His total taxes thus equal four thousand five hundred dollars which is 22.5% of his entire income. This is a significantly larger chunk of his income than that which Mr. Millionaire is paying.

I used two individuals from opposite ends of the spectrum as the examples in order to highlight and make obvious the stark contrast between them. Here’s a list compiled by Forbes with the average household income before taxes, followed by the average annual expenditures of these groups. Notice how the more one earns, the smaller percentage of the paycheck actually spent.

Poorest 20%: $9,168 Expenditures: $17,837
Middle 20%: $41,614 “ “ $36,980
Richest 20%: $132,158 “ “ $83,710

Because of the disadvantage to the lower earners, the proposers of the Fair Tax have included in their plan a pre-bate which will be doled out monthly to every single U.S. citizen. The pre-bate for 2010, which will be based on the poverty level expenditures of the current year, was $ 2,491 annually per household (double if it’s a two-adult household) with an additional $860 annually per child and a cap at seven children. The result of these pre-bates would be that all those near or under the poverty line wouldn’t have to actually pay any taxes, with some of them actually walking away with extra cash in their pockets.

The figures used in the above two examples (Mr. Millionaire and Mr. Low Income) did not include the pre-bate since I wanted the flaws of the entire system to be obvious to all. The results though are still troubling. Although Mr. Low Earner’s tax rate is lowered to only a little over ten percent in taxes, Mr. Millionaire remains with an even lower rate of 2.75% taxes

The Fair Tax clearly won’t work for the low and middle income earners without the formation of a gigantic new bureaucracy. When trying to get rid of one arm of government the results shouldn’t include the creation of an equally large system. The implementation of an entire new bureaucracy is never worth it, no matter the benefits. As with other entitlement programs, a system such as the pre-bates is guaranteed to cause illegals and others to milk the machine via fraudulent methods.

Furthermore, although the Fair Tax may seem like a wonderful idea, there are too many gray areas, and not only with the pre-bates which will most likely lead to forgery and stealing. In 2009 the one percent highest earners paid over forty percent of the total amount of income tax that came in. With the Fair Tax, this will no longer be the case since Warren Buffet and his equals don’t spend the majority of their income. They invest and save a large percentage of it. The very rich are also most likely to vacation out of country, which will amount to millions being spent elsewhere without being taxed. They can also afford to purchase high-end products out of the U.S. thus once again circumventing the Fair Tax. Therefore, although the promoters of the fair tax have declared a 30% tax rate sufficient to replace the progressive income tax and payroll tax, others calculate it would have to be set at forty percent or even higher in order to effectively generate enough income for the federal government.

The Fair Tax would make all products sold within the country considerably more expensive thus discouraging shopping expenditures from tourists and residents alike. Although goods are currently pretty expensive because the corporations pass down their high taxes to the consumer it is still far lower than it would be if the Fair Tax is implemented. The higher prices will also lead to the blooming of the black market and discourage to buy products in America. The largest brunt of the tax would thus be felt by the low and middle earners since the average American, unlike the highest earners, spend the bulk of their paycheck on necessities.

Additionally, the claims that the Fair Tax would completely shut down the IRS is untrue. Although its size would be decreased drastically, someone would still need to monitor the shop owners, landlords, doctors, and other companies that will be in charge of collecting and passing on the appropriate sums of tax. A new bureau will also need to be created to manage the pre-bates.

The Fair Tax also doesn’t tackle another serious issue plaguing this country related to taxes, which is the disconnection between the fifty three percent who support the other forty seven percent. The Fair Tax will continue to promote and even strengthen this divide where half of America pays taxes while the other half receives extra cash. One of the reasons why Washington has been able to revamp the tax laws causing it to spiral completely out of control is that almost fifty percent of the nation doesn’t pay any taxes. The changes thus affected only half the country and half the voters. Furthermore, the changes are usually implemented in stages, affecting only one specific income group or groups at a time, thus affecting an even smaller percentage of people. Therefore, despite the protests of those whose taxes were raised, these politicians were able to have their way and still get reelected by the other larger percent of people which were unaffected by the change.

It also doesn’t take into account those living in states which already have sales tax, especially those which have a high sales tax. The effect will be disastrous for shops and shoppers alike. One last point, the fair tax is a theory which has never yet been implemented in a national form and it is unknown whether it would be a success.

An alternative solution which other conservatives promote in lieu of the current system is the Flat Tax, where everyone would pay an equal percentage of their income regardless to the amount they earn.

The current tax code which divides America into separate brackets will no longer exist, and politicians will no longer have an easy field igniting class warfare in order to promote their own interests. The rich will all pay their fair share since all loopholes and tax breaks will be eliminated. The flat tax will also create millions of new taxpayers who will pay the same low rate as the rest of the country. It will be low enough not to hurt them seriously yet significant enough for them to feel a sense of unity with the rest of the country. With everyone will pay an equal percentage of their income to the federal government it will result in the entire country being equally affected by taxes and equally outraged over wasteful government spending using taxpayer dollars.

The Flat Tax has been implemented in many countries across the globe including Ireland, Hong Kong and many former communist countries, almost without exception at a rate below 20%, with those countries having seen tremendous economic success. The current proposal in the U.S. is at 17%, and although not set in stone, will not rise higher than twenty percent. It probably won’t need to be higher than the teens since the elimination of loopholes will create an influx in tax money.

The Flat Tax allows the first ten thousand dollars every taxpayer earns to be earned tax-free. Thus, the very poor will pay no taxes while those making somewhat more will pay tax on the remainder which will amount to a minimal figure. Thus, if the tax rate would be at 17% Mr. Millionaire would pay $168,300 (he would save $1700 dollars on the first ten thousand dollars he earns which doesn’t decrease his tax significantly.) Mr. Low Earner would pay an equal percentage of 17% totaling only to $1,700 annually (and would save an equal $1700 which slashes his taxes in half and does make a significant difference). No complex government program is necessary to ensure taxes are not too high for anyone, as with the Fair Tax, while the government continues to receive their necessary funding.

One of the many problems with the current progressive income tax which the flat tax eliminates is the many brackets taxpayers are divided into with higher tax rates for higher earners. An individual earning a figure at the top of one bracket is better off staying within his current income than somehow increasing that income. This is so since earning those few extra bucks will cause him to enter the next tax bracket where the tax rate is significantly higher, thus ultimately leaving with him with less money than before his raise. This discourages employees or small business owners who are at the borderline between brackets from increasing their income, since the end result is a decrease.

The Flat Tax resolves this issue, since one pays an equal percentage per dollar no matter how much you earn. The billionaire and the pauper will each pay the same percentage per dollar. Mr. Millionaire will pay the same percent per dollar earned as Mr. Low Earner. Mr. Low Earner, who may have made the calculation under the current system that earning any additional income will serve to his detriment, will be encouraged to seek an increase in income because his taxes won’t increase directly with each raise. Additionally, Mr. Millionaire won’t get away with his paying an equal percent of taxes despite his out of country vacations and saving habits, unlike at the Fair Tax.

The elimination of all complex tax brackets, tax breaks, and loopholes significantly simplifies the process, allowing taxpayers to file their taxes on a simple postcard. The Flat Tax will also eliminate all double taxations including the abolishment of the death tax, capital gains tax, no double taxation of saving, and no double tax on dividends. By taxing income only one time, a flat tax is easier to enforce and more conducive to job creation and capital formation.

In light of the above information, the conservative movement should drop their support of the Fair Tax since it will create more bureaucracy, more entitlement, stunt the economy, and benefit the very rich and very poor with the burden falling on the middle earners, stunt the economy.

The Flat Tax on the other hand is a better and simpler solution, although it could use some minor tweaks. It should include abolishing the payroll tax, even if it will involve raising the flat rate with several digits. The only serious opposition against it is the forty seven percent of this country who currently pay zero taxes and who will be taxed equally together with the rest of the country or those benefiting from loopholes. However, I think it’s only fair everyone should pay their fair share. Obama has always demanded shared sacrifice. I don’t see it as such, but rather that each citizen has a responsibility to the country and should thus contribute their fair share to support its expenses such the military where a few endanger their lives doing their utmost to protect the many living peacefully in this country.

None of the current candidates have currently fully embraced either of the two plans.

This article is cross-posted from The Thinking Voter.