Fair Tax Simple, Easy Way to Solve Tax Problems

By: Matt Sunderlin

It seems these days that healthcare reform is the issue everyone is talking about. Sure, we’re fighting two wars (well, a war-and-a-half), we’re clawing our way out of an economic recession, and the national debt continues to spiral out of control, but apparently the top priority is somehow convincing Uncle Sam to pay for Grandpa’s hip replacement. Fine and dandy.

The fundamental question, though, is: where does that money come from? Before you storm off, remember that this is not an article on healthcare reform. Powers know we’ve seen enough of those already. No, the purpose of this article is to discuss something underlying every other major national issue today: tax reform. Healthcare is merely the trillion-dollar icing on the cake.

The primary purpose of taxation is to provide revenue for government. The U.S. tax system fares poorly here—by its own admission, the IRS is able to collect only about 85 percent of taxes owed, leading to shortfalls in the hundreds of billions of dollars. Additionally, since tax liability is based on income, any income that comes from sources difficult to document, such as cash-only businesses, is effectively untaxed; such enterprises total about $1.5 trillion per year, meaning additional hundreds of billions in lost revenue.

The U.S. tax code is even a burden on economic growth. While many large corporations can limit their taxable income by moving offshore—taking jobs with them in the process—and investing in foreign tax shelters, small and medium businesses cannot afford to do so. For every $100 paid in taxes, small businesses pay over $724 in tax code-compliance costs. This is a total of $500 billion wasted every year, a number which grows at the rate of eight percent annually. And due to punishing corporate tax rates of nearly 40 percent, starting a new business on US soil is all but discouraged.

These numbers are not encouraging. Most troublesome of all, however, are the projections from the U.S. Government Accountability Office, which state that if current trends continue, federal revenues by 2040 will be insufficient to cover the interest on the national debt, much less pay for anything else. (This report was issued before the current healthcare bill was proposed; doubtless, trillions more in Federal expenditures will only accelerate the crisis.) Clearly, it is important to find a solution, and it is probably not too difficult to determine that doubling the income tax is a bad idea.

Enter a bill known as “FairTax.” First proposed by Congressman John Linder (R-GA) in 1999, FairTax would replace all federal income taxes with a national sales tax, levied on purchase of consumer goods and services, without exception. To counter the inevitable objection that this would unfairly increase the cost-of-living for those least able to pay, the FairTax bill provides for a monthly payment to households to preemptively refund all subsistence spending up to the poverty level.

Revenue generation is greatly enhanced under FairTax. Because tax is assessed as a percentage of spending, not income, it’s much more difficult to avoid the system or avoid tax liability once inside it. Avoiding a sales tax on items you purchase every day is much more difficult than simply lying about the size of your income and hoping the IRS is too overworked to find you. And because everyone eventually buys goods and services, even the $1.5 trillion cash-only economy will be taxed—hot dog stands are hardly self-sufficient, after all.

The elimination of corporate taxes, which are mostly passed on to consumers via higher prices anyway, is the true genius of FairTax. The lack of corporate taxes provides a powerful incentive for U.S. companies to come back from overseas and for foreign companies to follow them—along with their attendant jobs and investment capital. This not only enriches the U.S. economy, but since more and better jobs allow more people to consume more, the tax base is expanded.

The profit motive is what makes the economy run; any system that tries to dampen the profit motive therefore also dampens the economy, and an income tax is no exception. So the next time you hear President Obama, or another of your elected officials, talk about funding healthcare reform or some other expensive new entitlement program by increasing corporate taxes, or through a “tax on the wealthy,” do yourselves a favor and point them at FairTax, instead. After all, the US income tax started as a tax on the top 0.5 percent of earners, and look where it is now.