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I recently received the following from a reader: What is the difference between fair tax and flat tax?
With tax season coming up, and with presidential candidates talking about tax plans (Mike Huckabee is especially vocal about fair tax), this is an exceptionally timely and relevant question. Here are the basic differences:
Fair Tax
This is a term that indicates an end to all taxes collected by the government, save a national sales tax of sorts. This national sales tax would be collected on every new purchase made. As of now, there are “prebates” offered to those with less money, since sales tax often means that those with less spend more. Additionally, there is no separate rate for grocery food items (something I would like to see).
Mother Jones offers an interesting look at the fair tax.
Flat Tax
A flat tax is one in which the same income tax rate is set for everyone, usually expressed as a percentage of income, such as 10% or 15%. Or higher. The idea is that it would “fairer” if everyone paid the same percentage of their income. Of course, it doesn’t address the problem that 10% of $20,000 is still a bigger hit to someone’s ability to live than 10% of $200,000 is to someone else’s…
Wikipedia offers an article on the flat tax, and Taxgirl has an interesting look at Fred Thompson’s flat tax plan, along with a guide for plan interpretation among other candidates.
Do you like one or the other better? Do you have a tax code solution?
I skimmed through most of the comments, and this may have been mentioned already, but one aspect I absolutely love about the fair tax is that you now get to collect taxes from those who are cicumventing the tax system, such as illegal aliens. Now, their purchases are taxed. Nice!
By the way, I’m a CPA and am all for the fair tax. Yeah, my tax return practice will be history, but there will be other ways I can use my talents. It’s not about making certain people happy but what is best for the entire country.
And, just think about the money that will be saved by abolishing the IRS. Yeah, there will need to be more sales tax audits and so forth, but nothing along the scale of the IRS.
I am a Fair Tax person. Thank you this is one of the best I have ever seen to expain the differance between Flat Tax and Fair Tax. I would like to see someone come up with some simple grafical charts showing how the Fair Tax benefits each tax bracket starting with $20,000.00 and then go up in increments of $20,000.00 up to $100,000.00 and then increments of $50,000.00 to $300,000.00 with married couple filling jointly.
Maybe those charts are already out there if so please let me know where to find them.
Thank you, Douglas Myers
I’ll take a look at it. Thanks for all of your insights.
Great!
Do yourself a favor, and do the research on the net, and read what the nay-sayers have to say. Then get the new book “Fair Tax: The Truth” by Boortz and Linder.
From what I’ve seen, most of the people that argue against the FairTax fall into one or more of the following categories;
1.) They have an agenda that would be compromised by implementation of the FairTax. These are mostly people (career politicians, lobbiests, etc.) that want to maintain the locus of power in Washington. By eliminating the existing tax code with all it’s exemtions and penalties for “undesired” financial behaviors, it returns economic power to the folks that earn the money. That threatens a lot of people.
2.) People that benefit from the current tax situation. This would include people, that for whatever reason, aren’t paying Federal taxes (those in the underground economy, those that use exemtions in the tax code to avoid paying Federal taxes, people with their money overseas that live here, etc.)
Most of the arguments presented by those in the above categories rely on changing the FairTax to something else like a VAT or a flat tax, of which it is neither.
3.) People that haven’t studied the FairTax and are just repeating information they get from those in the above categories.
“FairTax: The Truth” examines the fallacies that opponents use to attack the plan, and shows the flaws in each of them. I believe you will find your research humurous , enjoyable, and rewarding.
In that, we probably agree :) There are very few things that would actually be worse than what we have now.
And I am reading more on Fair Tax.
Well, even if the picture is not quite as rosy as I paint it (a point I will not concede), it’s got to be better that what we have now.
LOL. You don’t stop trying. I’m not sure it work out QUITE so nicely in terms of “passing on the savings.” But I bet that some companies would come back here. Others, though, would stay put regardless — due to lower wages they can pay in some countries.
Besides, a lot of the large corporations get subsidies and special tax breaks anyway. They don’t really need further tax incentives. I can see how such a structure would help small and medium sized businesses, though.
How about this…
Since US corporations no longer pay income tax, they don’t have to pass that expense on to their customers, thus eliminating the disadvantage they have been operating under against overseas competitors. US exports go up and the trade deficit goes down.
Since there is no longer an income tax to pay, many corporations that located overseas to avoid the expense, relocate to the US to take advantage of the more capable employee base, creating more jobs, and the unemployment rate drops drastically.
Likewise, foriegn corporations that found a slight advantage overseas now see those tables turned. Companies like Daimler-Chrysler decide that it is now advantageous to locate here, and closes the German offices (located in Germany because of the repressive tax structure imposed by the IRS). Even more jobs and lower unemployment.
All those people that sent their fortunes overseas to avoid paying taxes on their earnings and estates bring that money back to the US and invest it in US companies.
Still need more?
Almost thou persuadest me…
What could be better than having zero taxes withheld from your check, and getting an additional monthly check to pay the taxes on things like food and basic health care costs?
It’s even better than getting a big fat raise, because you don’t have to pay income tax on ANY of it.
Hmmm…I’ll give Fair Tax another look…
The prebate was included because if you start exempting things, then you give Washington something to fiddle with. If you start with one expemtion, then others are sure to follow, and then the whole thing starts to fall apart again. The prebate is a simple, uncomplicated way to ensure no one pays taxes on the amount of money it takes to provide those things necessary to maintain a minimum standard of living.
Also, if you exempt something like milk, then the people that have the money get to take their milk baths tax-free. Give ‘em that first couple of gallons without tax, but make ‘em pay taxes to fill up the tub.
The Federal government already sends money to millions of people. It would be a very simple matter to set every household up with direct deposit to either a debit card, or a bank account.
As to the state funds, the FairTax replaces only federal taxes, and does not impact state taxes at all. Since the final price of goods does not change due to the elimination of embedded taxes, the price at the register does not change. What used to have $1.00 in state sales tax, still has $1.00 in state sales tax.
It takes a little study (very little, really) to get your head around how the FairTax works, but once you do, you’ll wonder why more people don’t scream for it.
Read the book. It’s a short and easy read, even for a guy like me.
It is looking better. I just wish we’d get rid of this “prebate” nonsense. Plenty of states are able to charge less on grocery (or none at all) in terms of sales tax, so it should be doable on the federal level.
But where would the states get money? Would it be on top of what the government charges? That would start to get crazy, since many states would increase property taxes if they could no longer collect sales tax because a federal tax bumped it up…
So far, the Fair Tax passes your test. While it does tax grocery food, at the beginning of every month, every household gets a “prebate” in the amount of the FairTax on the “poverty level” for that size family, so the tax you will pay on the essentials is given to you at the beginning of every month.
As far as eliminating the income tax as well, there is a provision in the FairTax bill (HR 25 and S 25) that says the FairTax will be implemented on Janurary 1 following the repeal of the 16 Ammendment (the one that authorizes the income tax).
Looking even better now?
Hee hee. That’s why I think of it as a “progressive” flat tax. It’s a flat tax, but it also applies to different levels. Also, in my twisted scheme, EVERYONE pays it. It may seem silly, but when you get your welfare check, something low (like 2%) comes out for “taxes.”
I suppose if we had a federal consumption tax (but not on grocery food) I’d be okay with that. But it would have to workable in terms of either eliminating the income tax or at least severely reducing it. It would force us to re-evaluate our priorities as individuals, and force to consider what we are spending our money on. (You know, do you really *need* a huge TV as opposed to something smaller?)
If it has progressive levels of payment, by definition, it is not a “flat tax”. A flat tax has one single “flat” rate for everyone.
I’m liking you more every time I read your latest message. Being the Libertarian that I am, I work to see the Federal Gov’t. limited to it’s Constitutional duties. I do believe that the BEST thing the government can do to benefit the people here at home is to get off our backs and out of the way so that we can do what we do best: ACHIEVE!
I am not confusing Fair Tax and flat tax. I am expressing that right now I favor a flat tax that is lower than the current tax, and one that has progressive levels of payment (capping at 18% for the wealthiest), no loopholes and no returns.
I am reconsidering my stance on Fair Tax after looking into it more.
I would like to reconsider our national priorities, and cut pork barrel spending and subsidies for corporations and other countries’ militaries so that a lower tax would be workable, AND benefit more of our people here at home.
Thanks for the compliment ;)
Please do not confuse the FairTax with a flat tax (as Sheila has). What is refered to as a flat tax is nothing more than creating one income tax rate from the existing tiered income tax, and we all know how long that will last. That approach leaves all the evils inherent in an income tax, and deliveres none of the benifits of the FairTax.
If you haven’t already done so, I STRONGLY encourage you to visit FairTax.org and spend some time there. I believe the more you investigate the FairTax, the more you will come to like it. I know I did.
BTW, it’s a pleasure communicating with you. Judging from your posts, I am led to believe you are an intelligent, savvy person.
No kidding ;)
A simplified flat tax that has everyone paying at a lower rate, but still progressive by income (and no returns, aka “wealth redistribution”), is something I am a little more interested in.
Although I am liking the Fair Tax a VERY little more as I look at it…
Kinda like the income tax we have now?