I recently stumbled upon the idea of a different tax system that some are advocating our country change to called The Fair Tax. I don’t know if my head has been in the sand about this or if many other people have never heard of it as well. It was an interesting concept to me so I decided to do a little research on it. As I started to learn about this system and what it would do, I became intrigued at the benefits it could offer.
I can in no way offer an in-depth analysis of this tax program in this short article (for that try FairTax.org or just google Fair Tax) but I can offer my view of how a system like this could benefit me and others in similar life and financial situations. I don’t know all the ins and outs of every part of this so there may be unknown drawbacks to what I would currently consider a benefit (I’m sure I’ll get some comments from opponents to the plan stating these) but this is just a brief overview of my initial reaction to this new way of possibly doing taxes.
For those unaware of the Fair Tax system, here is a brief description of it taken directly from the Fairtax website:
The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.
The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.
The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
The numbers for this proposed sales tax rate I’ve found vary between 23% and 30%. The “poverty level” referred to above I found stated on the website as $24,000 a year.
Again, I don’t know everything there is to know about this tax plan or how much it would really save or cost me and millions of other Americans, but I do have a list of reasons why this tax plan could be a good thing (based on the information I’ve found).
We would keep 100% of our paychecks: Who likes having a yearly, monthly or hourly salary number that they are given, yet only seeing a certain percentage of that in your check? It’s always frustrating seeing how much money the government takes out of your check each pay period. We accept it as a fact of life, but we wouldn’t have to under this plan. Granted we would still have to pay taxes in a different form, but it would still be nice to see your paycheck actually reflect the money you make.
No more IRS: Enacting this tax plan would basically abolish the IRS. That’s enough to make you want to throw a party! No more April 15th doomsday, no more deductions, no more 1040 forms and schedule As and all the junk that comes with filing your taxes. No more forms and no more confusion. Because honestly, how many people besides tax accountants really understand our current tax system?
A monthly rebate: Who doesn’t love receiving checks in the mail? Or an automatic deposit for those more in the current times. In order to eliminate taxing of essential items and necessities, people would apparently receive a rebate of taxes paid on items totaling up to $500 per month (as I understand it). Since the poverty level is $24,000 a year, it seems that basically the first $500 a month you spend are not taxed. Now I don’t know how they can use one figure for everyone in the country and assume that each family’s necessities will fall into that figure nor do I know if people with bigger families get more back as their basic needs costs would be higher. Depending on the fine details, this could go either way.
Lowers tax rates: By only taxing purchased good, the plan promises to lower tax rates for everyone. Sounds good to me if it actually works out that way.
Makes products cheaper by eliminating the hidden taxes the manufacturers have to pay and pass on to you: So most items should be cheaper because of this. Then again, we’ll have to pay the 23-30% tax on top of that so I guess it’s a toss up.
Encourages people to save and invest by not taxing interest income or saved money: I think this is my favorite part of the plan. People would be rewarded for saving and spending less. Money you put in your savings account and retirement funds wouldn’t get taxed at all. This would mean you actually get to keep the interest you make on saving and investing. And since taxes would be based on spending, the less you spend the less you pay in taxes. This would help give people a break and give them a better chance to create an emergency fund and fund their retirement accounts and save up for big things like a down payment on a house. I personally don’t feel like there is much of an incentive nowadays to save since we usually end up paying taxes on the interest we earn, but with this plan we would definitely have an incentive.
Every idea or system has good sides and bad sides and I’m sure there are negatives that go with each one of these positives. And while a tax system like this may benefit someone like me, it may not benefit everyone else. So as you prepare to file your taxes with the IRS this year, here’s just something to think about that could be in your future.
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