One American Citizen

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Tuesday, January 28, 2020

Why the Fair Tax is the Best Tax

     Everyone hates taxes. Shoot, our country was partially founded because of high taxes. There are many complaints about tax inequality floating around and there is a solution to those claiming a grievance about taxes. Its called the FAIR Tax Act and has been floating around for awhile. It calls for scrapping the bracketed tax scheme we have now and implementing a standard point of sale tax on material goods and services. No more inequality, everyone pays the same percentage of taxes without loopholes or deductions. It would replace the all the federal income tax, payroll taxes (such as social security and medicare taxes), gift tax, and estate taxes with a single tax.
     This legislation was first introduced in 1999 and has had movements form behind it throughout the years without success. The most recent bill introduced called for a 23% point of sales tax, meaning everyone pays the same. It also calls for a monthly advance "prebate" for taxes up to the federal poverty line, which in 2019 for a family of four, is $25,750. This means that you basically get the first $25 thousand you make, completely tax free. You only pay taxes on what you buy, that means any money you stash into a savings is all yours prior to the government taking their piece of the pie.
     There are a few valid complaints. The biggest one is on seniors, especially those who are retired shortly after this is implemented. Seniors that are retired right now, paid income tax their entire career. If this tax gets enacted, not only would they have paid years worth of income tax, they would now be forced to pay a new sales tax that would greatly reduce their income which is already fixed. I feel that this could be easily remedied by giving seniors exemptions for awhile with a sunset clause in the legislation as over time the burden would be reduced until the first group of seniors that have never payed an income tax come along.
     Another complaint is the taxing of essentials such as food, utilities, mortgage, etc. At first glance that sounds bad because those items generally don't fall under a sales tax. But look at it this way, right now a married couple with two dependents making $80,000 is paying 22% of their income to federal tax regardless of what they do with that money. With the FAIR tax, the government is not going to tax the first $25,750 of sales and the government is going to give you $493 a month as a prebate. With those figures the MAXIMUM net tax rate would be %13.66. For every dollar you save, your effective tax rate for the year goes down because that un-taxed dollar is not being spent. Under the current tax structure, with the standard deduction and child tax credit, your effective tax rate would be %14.19.
     The other thing that would change under the FAIR tax is that money you pay for taxes is also tax free. Right now, since every dollar you make is already taxed, any other state and local tax that you are required to pay is essentially double taxed. Using the same figure as earlier of $80,000 a year, if you have a 10% sales tax in your state, your item that cost $100 dollars will ring up at $110 dollar. That $110 has already been taxed at 22% and you have really paid $134.20 for it. Under the FAIR tax, assuming your state will not tax the federal tax, you will pay a total of $133 dollars. If you spend $40,000 of your income on goods that would equate to $480 dollars more under the current tax scheme simply because you are paying tax, on tax.
     Other complaints such as the line "it will be tax cut for the rich" ring untrue. It's simple, wealthy people have more money to spend. Right now, most wealthy people use loopholes to avoid paying taxes, such as investing capital gains immediately, as most of their wealth comes from investments rather than wages, or donating to charities for a tax right off. With the FAIR tax, they would be subject to a 23% tax with no loopholes or workarounds for them. So if you make $50 thousand, your taxable income is $25 thousand and if you make $1 million, your taxable income is $975,000. That means that the effective tax rate for the extremely wealthy is 23%, while for the middle class, it's substantially lower.
     Under a flat sales tax, you decide what your tax burden is. If you are good with money and don't spend recklessly, you can lower you tax burden. Right now, nearly 100% of your income is taxed and you have zero say in it. You would have the option to plan for your tax bill on a major purchase such as a car rather than pay it before you even decide to buy a car. Another big advantage is that you could now put your money into an interest bearing savings account that is pretax. If you know you are going to need a car in five years, you can save for it and actually pay for the tax in part off the interest gained.
    Under this tax plan, it would give the power back to the people. I personally have a problem with paying taxes to the government and then having to figure out if I've paid too much or too little. This is a much fairer tax plan because everyone pays and the lower you income, the lower your tax burden. And the best part, No more IRS!

-American Citizen

PS: I understand there are many factors when calculating tax and this is just a generalization. If you don't like my math let me know.
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