Fair Tax versus Flat Tax

Posted August 29, 2015  |  Filed under Economy

There is no doubt that the Federal Tax Code needs to be scrapped and replaced - but with what? Let me give you something to think about.

In this article I am going to compare two popular tax models that many politicians are talking about replacing the current tax code with. I have to say that both are better than the code we have now, but they both also have flaws in my opinion. Before I talk about these two proposed tax codes, I want to speak about the current system. That way you can compare the current system to the two proposed tax systems.

In the current system, the tax rate is different based on the amount of money you make. It is known as a progressive tax code system. The more you make the higher your tax rate is. It starts out around 10% for those who don't make much income to over 40% for those who make over $400,000. This varies based on if you are single, married, or fall under another status. However, there is a huge amount of the population that doesn't pay any taxes at all! Approximately 47% of the US population doesn't pay any taxes at all. That means only 53% of the population are paying all the taxes - and the ones at the higher tax brackets are paying the most. Now here is something else, there are a lot of people that get a rebate from the government - even though they don't pay into it. In my opinion, this is totally not fair. Everybody should have skin in the game! Remember, the people that don't pay into the system are getting the benefits from the government that everyone else is paying for.

Of the two methods, the Flat Tax is the easiest to understand. Basically, there is one tax rate for all people. For example, it could be 10%. Everybody would pay the same rate no matter how much they make. The complaint here is that the people that are making a lot of money are not paying their fair share. I don't see how these people feel that way. Even under a flat tax, those who are making more are paying more of the taxes and even paying the lion share of the taxes. For example, using a 10% tax rate, someone making $20,000 a year would only pay $2,000. Someone making $400,000 would pay $40,000. See - they are still paying the most compared to the rest of the population.

There are a couple of ways to implement the Flat Tax. One way is to not have any deductions at all, and the other would be to have limited deductions, such as when buying a home. I say not having any deductions at all would be the best way to go. It is fair. And it keeps the politicians from creating new deductions in the future for those groups who have contributed to their campaigns. That is one of the reasons why our current tax code is so complicated. Politicians over the years have created deductions to people and groups who have contributed to their campaigns. Also, they have created deductions and tax rates to get votes. That is why 47% of the population doesn't pay any taxes at all at this time.

The current tax system and the flat tax system have several major flaws. That is because they are the type of system that taxes your income directly. Let me point out some of the issues. First, politicians can easily find ways to create special tax rates and deductions to get votes and to repay those who donated to their campaigns. Even if the new system starts out with no deductions, they can always add them later. Another problem with this type of system is that you need a huge bureaucratic organization (the IRS) to collect taxes and do audits. This takes money out of the tax system to run the organization as well as lowering the moral of the population - especially if you have to deal with them. Also, what about all those folks that make their money through illegal activities, such as selling drugs and prostitution? Do you think these folks pay any taxes on their income? And then there is all the fraud, waste, and abuse that happen due to this type of system. Billions and billions of dollars are lost every year due to people filing fraudulent tax returns. And from what I can see, the government either cannot stop these problems, or they are not willing to stop these problems, or both. The one point I do want to make is that although the Flat Tax system may have some serious flaws, it is better than the current system.

In my opinion, the Fair Tax system is the closest to being the "fairest" tax system and solves a lot of problems. However, as currently written, it does need some tweaks. Basically, the Fair Tax is simply a "national" sales tax. It is simple - the current system is totally scrapped and a national sales tax is added onto everything you buy, except for food, services, medicine, medical stuff, and house purchases. It's that simple. The thing you have to watch out for is those politicians that want a hybrid system, such as keep the current system but lower the rates and add the national sales tax to the system. You would still have all the flaws mentioned above. Don't let them do this, otherwise, in years to come we will be back up to a 40% income tax and have a national sales tax on top of that. No thank you! The current system has to done away with when the new Fair Tax is implemented. Period! Now let's talk about the benefits of this type of system.

One benefit to the Fair Tax system is that it is easily implemented. The system is already in place. When you go to the store, you already pay sales taxes. All they need to do is add the national sales tax to the current rate. The stores would add this to the amount they send to the State Tax Office, and then the states would simply send it to the Feds. This is usually collected and passed to the states on a monthly basis, so another benefit would be that the Feds would get a much smoother cash flow on a monthly basis, instead of most of it coming in April. Another benefit would be that the IRS could be cut down to about an office of 10 people to receive the funds from the states. This alone would save billions each year. That means no tax forms, no tax collections, and no audits. No taxes would be taken out of your paycheck. There would not be a need for tax accountants and tax attorneys, so these folks could direct their attention on other areas of their industry. The Fair Tax system would be for both people as well as for businesses. Businesses would have to pay the national sales tax on all the stuff they buy for their business, which would be a lot. Keep in mind that businesses now write off the things they buy as expenses. But this would lower the business tax rate, which would make our businesses a lot more competitive in the world and a lot of businesses would bring our jobs back to the US. This would grow the economy in a huge way.

Another benefit would be that politicians could not create special tax rates and deductions for the people who contributed to their campaigns or to buy votes. Fraud, waste, and abuse would be virtually eliminated because there are no tax forms to fill out. This would reduce identity theft. Fraudulent tax returns could not be submitted. This accounts for billions and billions of savings every year. And again, what about all those folks that make their money through illegal activities, such as selling drugs and prostitution? Well now they will be taxed because when they buy something, they will pay the national sales tax. Then there are those who say that the rich people would make out. Wrong! In some cases they would pay more than they would under the current system or Flat Tax - remember - they are paying a national sales tax on everything they buy - and I am sure they spend a lot more than the average person. Plus there is no way to evade taxes - unless you never buy anything, which is impossible.

Now let's talk about the tweaks I mentioned that the Fair Tax needs. As it is currently written, the Fair Tax has a thing called a "prebate". This is an amount of money given to those on the lower end of the income level to offset the national sales tax they would be spending. In other words, they are giving money to those people who don't pay taxes now so they won't have to pay taxes under this system. To me, this takes the "fair" out of Fair Tax. As I mentioned before - everyone benefits from the government so everyone must have skin in the game. There should not be a prebate in this system, otherwise, we will be back to 47% not paying taxes and 53% paying everything. The other tweak is that as it is written, is that I don't believe the new national sales tax needs to be as high as it is currently estimated. I've seen a variety of calculations, some as high as 23%. With all the savings of this new system and the growth of the economy, I believe the national sales tax would be much lower, probably around 10%. But even if it was higher, it still would have all the benefits I mentioned. There are a few minor tweaks I can suggest, but this article is getting to be a bit long.

So, in my opinion, the Flat Tax and the Fair Tax are both much better than what we have now, which is not hard to do. But the Fair Tax is the best solution, with some tweaks. It is very easy to implement, saves so much money, stops fraud, waste, and abuse, reduces identity theft, and raises the moral of the population.

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