Disadvantages of the Fair Tax Act

This is the third article on the Fair Tax Act. This week we discuss the disadvantages of the bill.

You can read the previous two articles here and here.

Enjoy this week’s blog post from Bellevue CPAs!

Critics of the system contend that those who earn no income and draw on their savings and other assets for living expenses will experience little or no benefit. The initial generation of those in this position will end up taking it from both sides as they paid income tax during their working years and now would pay sales tax during their retirements. Furthermore, since at least the majority of states would in all likelihood follow suit and change their tax systems as well, the effective tax rate could climb as high as 45%. And if certain items such as food or healthcare were excluded from the tax, the rate on remaining goods and services could conceivably rise another 20%!

There would, of course, also be the small matter of establishing another governmental agency to oversee this system. There is still some question of how exactly it could be implemented and enforced, and many doubt the ability of any agency to be able to adequately accomplish this. Advocates tout that even criminals would have to pay their share of taxes through their purchases of retail goods, but this element of society will obviously not be reporting the dealings they have amongst themselves.

Perhaps the biggest strike against the Fair Tax comes from academic research that suggests that 9 out of 10 taxpayers would pay more taxes under the Fair Tax system than they do now. Although it will affect the different economic layers of society somewhat differently, it would seem that the wealthy would end up paying less tax while the upper middle class would be hit the hardest. And, of course, all of the professionals who have spent years learning our current tax laws will have to find a new way to make a living.

Ultimately, we would simply have to enact the Fair Tax in order to see just how it would really play out. There are several variables here that are basically impossible to predict, and the risk that comes with uncertainty may be enough to prevent its creation. If you decide to vote for this proposition, be sure that you have as clear an understanding as possible of how it will affect you.

Benefits of the Fair Tax Act

This week’s post expands on the Americans for Fair Taxation post from last week with a discussion of a few of the benefits of the Fair Tax Act.

This tax system differs from many of the other flat-tax concepts that have been presented because it completely replaces our current system, while other options will retain at least a portion of our present structure. It is also designed to draw only the same amount of money out of the economy as what is due to the government without retaining any in and of itself.

One of the main benefits that Fair Tax proponents claim their system will provide is massive economic growth. Because the tax will only apply to consumer goods and services, wealthy investors and institutions will be motivated to invest in tax-free havens such as light and heavy industries, production facilities, charitable organizations and other avenues of commercial development that would create millions of jobs and develop our infrastructure. The tax system will be vastly simplified because we will not have to file any more income tax returns, which will lead to further savings because there will no longer be a need to fund the IRS.

Foreigners and other visitors from outside the country will also help to fund us with their retail purchases and could even provide financial equalization from illegal immigrants, since they would not be eligible to receive prebate checks. The system also promises to replenish the Social Security trust fund and provide citizens with greater freedom to choose how much tax they through their personal selection of goods and services.

Advocates of the Fair Tax have been quick to point out that Florida and Texas-two of the richest states in our country-use a state tax system that resembles their idea in several respects. England also experienced one of its most prosperous eras when it used a sales-based tax after the defeat of Napoleon.

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