The idea known as the FairTax was introduced to Congress by Georgia Representative John Linder (R) in 1999 where it currently has 59 cosponsors.
While there are other tax bills in place to reform the current system, the FairTax appears to have the most backing between passionate grassroots supporters and high profile politicians. For those unfamiliar with HR 25, it seeks to:
- Repeal the 16th amendment
- Change tax collection from point of income to point of sale
- Get rid of the current tax code in full
Repealing the 16th Amendment
The 16th amendment states that "the Congress shall have power to lay and collect taxes on incomes, from whatever source derived......"
This gives the government the ability to determine how much of a citizen's income they can confiscate for the needs of the nation, such as roads, schools, and their own salaries. Under Presidents Eisenhower and Kennedy, it was 91% for those in the top tax bracket. Today, it is 35%. It is very appealing to many taxpayers to think that they could receive all, or almost all of their pay, but it is a reality that taxes need to be paid and collected.
The FairTax Will Change Where Taxes are Collected
Under the FairTax, taxes will be collected through a 23% inclusive retail sales tax, meaning that if an item normally costs $77, it's retail price will be $100. As unappealing as it sounds, there are two factors working in the favor of consumers.
The first factor is that there will be no difference between take-home-pay and salary. Today a person earning $10/hour for 40 hours will typically take home $1,245 a month. Under the FairTax, that same person will take home $1,600. So, while goods have gone up in price by 30% exclusively ($100 items are now $130) this person's cash flow has increased by about 22%.
In addition to this, the FairTax bill includes what it calls a monthly "prebate" where money is sent to every household (based on number of people) to cover their tax cost up to the poverty level. A single adult's poverty level spending would be $10,400 bringing his annual tax burden to $2,392 (original retail price of goods plus 30%) or $199 a month.
When a single person earning $10/hour receives an extra $199, his total monthly cash flow has increased by 34%, granting him more purchasing power than the FairTax would impose.
Consumers who will not be favored by this system are those who have managed to evade income tax collection. This group, referred to as the "underground economy," by Neal Boortz and Rep Linder in The FairTax Book, includes waiters, illegal immigrants, prostitutes, and drug dealers. Additionally, tourists will be subject to taxation as they will be charged the same 23% as anyone else for retail goods.
Eliminating the Current Tax Code
The FairTax is a comprehensive document consisting of 131 pages. If it was to become the tax code, then most high school graduates would be able to read and understand it. Currently, the US tax code is approximately 3.4 million words- about 19 times as long as Harry Potter and the Deathly Hallows. If it was to be printed as a Microsoft Word document, it would be more than 8,000 pages long.
The FairTax has lost some of its steam in the House of Representatives with the recent change to a primarily democratic congress, but grassroots supporters around the country are growing as the issue of taxes has become a growing concern, as noted since April 15th when thousands of TEA partiers gathered around the country in protest, and have continued to since then.
Sources
Linder, J, Boortz, N. The FairTax Book. William Morrow.
Walker, John. "US Tax Code On-Line". ftp.fourmilab.ch.
"History of the US Tax System". treasury.gov.
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