Friday, January 13, 2006

The Fair-Tax

I admit I haven't read the book, but I already think that this tax is better than the one we currently have in place.

The basic idea is that a sales tax would replace all income taxes. I think people would be less concerned about paying taxes based on their spending rather than paying taxes based on their income. It would also save the government some of the cost's associated with tax collection. The rate would be about 23-30%, and it would supposedly bring in as much money as we do now.

First thing to note, before people start saying it would be regressive. They proponents say that we could include a rebate (in the form of a check from the government each month) for each family/person that would cover the cost of essentials. In practice this mean a check for 23-30% of the poverty level for each family/person. This seems fairly a fairly flate rate (by that i mean, not progressive nor regressive) and that's good. I think that people who make enough money could choose not to recieve this rebate. Of course, the rebate would create a new beaurocracy (who is a citizen, and who gets one of these checks? What do people who are now on their own as opposed to living at home do?) and letting people opt out would add to that, but I think the costs would still be less than they are now.

Also, please note, we can vary the rates of taxation. A sales tax on food doesn't have to be as high as a sales tax on luxury boats. That could make the system more progressive, and it would also act as an impetus for savings. Paying a higher rate of tax on something will encourage rational actors not to buy they save their money, therefore relying less on social security for their old age. Even a flat sales tax would encourage saving...what will you think when you go to buy the flat-screen tv and it suddenly costs 30% more? ("I don't really need that big of a tv. I don't really need those extra dvd's.")

Anothing benefit for this, is that it looks like everyone gets a pay raise. It doesn't work out that way...people will pay almost the same in taxes as they did before, except for people at the low end of the spectrum who will pay practically nothing because of the rebate. I also think that the income tax is basically a tax on the priviledge of working. If you work, you have to pay the tax to the government because they allow you to have a job. (I know this is an extreme statement, but it's pretty true, even if it's not intended that way) However, if you pay a tax on the things you buy, you are now paying for the priviledge of purchasing those things. Instead of being taxed for your passive actions, you are consciously making a choice "Do I want to buy this, and pay the tax on it? Or do I want to save my money?" It gives the decision to the citizen, rather than just taxing them for working.

An easy way to figure out who gets a check would be to have two forms: one that each person fills out when they are employed, like the w-4, and another that would be available in many places, like the internet, the town hall, maybe even free for the taking from convienence/grocery stores, that you would fill out if you were un-employed, and then send on to the now-much-smaller IRS. Since you would be paying the tax due with every purchase, and there would be no possibility of not paying the tax, you would not need to fill out loads of paperwork on april 14, therefore giving me a better month of the year to have my birthday.

A sales tax would also take away the need for the capital gains tax, and the inheritance tax. All that money would be taxed anyway, when it was spent. So there will be much less unimportant stuff for our politicians to argue about, and they could do the jobs they're supposed to be doing.

I do think that if we allow variable tax rates on different good, our system could become needlessly complicated. That's something to watch out for, and certainly speaks in favor of a straight flat tax rate.

Some states already use this method, especially ones with lots of tourism. It is a big revenue generator for states like California and Florida, and Maine even has a pretty good system in place. Maine still has an income tax, but it also has a relatively low sales tax rate. I'd rather just have the sales tax, and it seems to be working ok for the other two that I mentioned.

I like the idea, and I wish there were enough people who were actively considering it so that we could get some more studies on it's probable effects and then maybe switch to it...but for now I like it better than system we have now.

Cross Posted at Mules With Brains

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