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Sunday, May 20, 2012

#2 Establish a National Sales Tax

Observations

I've been pretty lucky to be born in America.  Where else can an individual start with practically nothing, build a career on little more than a High School education, the willingness to help others, and an active curiosity, lose it all and gain it all back, and still be able to live a comfortable life.  (I'm not rich, just blessed).  My wife says there's an angel on my shoulder.  I think its her.  Many pleasant surprises have happened in my life; marriage, daughter and grandchildren are at the top of the list.  And some sobering encounters with reality as well.  Among them are business travels to foreign countries which is not the glory ride everyone thinks it is, but it is an eye opener.  Food can be a delight or a challenge.  Language is not so hard if you speak with your heart and avoid politics.  However, you never get used to poverty, to sub-standard working conditions, to oppressed cultures, to limited opportunities, and to the sadness in the eyes of those who have given up long ago.  The best thing about world travel is coming home, but I worry about how much time we Americans have before our liberties and freedoms disappear like theirs did?

Our children and grandchildren deserve no less than the freedom we had at their age.   FairTax Dave


The Power of Simplicity


HR 25, Title II, Sec. 201, Subtitle A, Chapter 1 establishes the national sales tax rate at 23% for the first year. The following years are subject to Congressional changes, but must be the total of the general revenue rate (14.91%) plus Social Security and Medicare predictions, i.e., the sum of the federal budget and the unfunded liabilities.  It is proposed in several studies the FairTax would grow our GDP at a rate of 7% to 10% each year for the next 10 years.  I am skeptical of such predictions because I'm not smart enough to check their calculations, but commonsense tells me growth should be much better than it is now.  For our country to step back from the cliff's edge of financial Armageddon we must quickly grow our GDP and seriously reduce spending simultaneously.  FairTax is half the equation, a very important half, but only half.  We need leaders in Washington who will make the tough decisions to reverse the irresponsible spending habits of the past.  But we also need a method to guarantee deficit spending will not return, i.e., a Balanced Budget Amendment.  This is beyond the parameters of FairTax, but recognizing there will be a defined amount of tax revenue from FairTax and few avenues to add new taxes (excise taxes), Congress will be forced to stop borrowing and reduce spending... or be replaced.

"The problem is not that people are taxed too little, the problem is that government spends too much."     President Ronald Reagan

Many have challenged the 23% as being too little to meet the revenue demands, but comparisons to the actual income tax revenue collected in the recession years of 2009 and 2010 finds the FairTax would have collected $171 billion and $276 billion more revenue respectively.  Big numbers that represent approximately 5% more collected taxes, not enough to make a huge difference, but more than one might expect.  It should be noted, consumption doesn't make drastic changes in reaction to the sudden rise and fall of the economy.  When a person loses their job it doesn't mean they stop eating, driving, using utilities or other basics of living.  Consumption is a much more stable and predictable tax base than income.  The national sales tax would only apply at the retail level to new goods and all services.  Used items such as tools, appliances, vehicles and homes are not subject to the FairTax (yes, previously owned homes are not taxed, but all services such as Realtor, Inspector, Title Search, finance fees, etc. will include the 23% tax).

America becomes a magnet for manufacturing 
There is no tax on common investments such as stocks, bonds, property, specialized training and higher education.  No, gambling is not an acceptable investment, however, any winnings from a legal gambling source is not taxed.  So if you win the Lotto you get to keep 100% (minus any State tax if applicable).  Tuition for college or trade schools are investments in your (or your children's) future.  Sales of materials or intellectual property between businesses necessary to produce a product or service is not taxed.  Export sales are not taxed because they are not sales to consumers.

"The hardest thing in the world to understand is the Income Tax"   Albert Einstein


Under our current tax code, taxes are considered a "cost of doing business" and passed on in the price.  This creates multiple taxation (remember the 22% embedded tax?).  Under FairTax, only the Retailer includes the 23% tax in the final price.  FairTax would reduce our prices to foreign customers by 15% to 20%.  Products imported from foreign countries are subject to the same 23% tax as American made products.  Aside from Duties, Imposts and Tariffs on foreign goods, neither U.S. or foreign products are taxed until they reach the Retailer.  FairTax levels the playing field by eliminating embedded taxes on exports, and by taxing imported and domestic products equally.  If its sold here, its taxed here, no matter where its made.  If its made here and shipped to other countries, its leaves our country without being taxed.  If you were a foreign company looking to build a new manufacturing plant, where would you build it?  Under the FairTax system, America would be the only place on earth with 0% taxes on manufacturing and a large population of skilled workers with money to spend.

"If duties are too high, they lesson the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds."     Alexander Hamilton

With FairTax, prices remain about the same
Prices of products combined with other costs would be less by an average of 22% embedded costs to the Retailer.  Apply the FairTax (23% included tax) and the price to the American customer is about the same as it is now.  Federal, State and local governments are not exempt from paying FairTax because they are also consumers.  Inflation can be a concern, but healthy competition plus keeping 100% of your earnings will temper that, and economic growth will come from U.S. and world consumption of American made products.  I suggest you visit www.fairtax.org and read some of the many white papers stored there pertaining to the economic impact of the FairTax (at the bottom of the "How FairTax works?" page, click on "Need more info? View our research.")

#1 repealed all taxes on income.  #2 established a 23% national sales tax to replace the repealed tax revenue.  If we stopped with just these two pieces of the puzzle we would have a flat tax on consumption, not a FairTax A flat tax will always be regressive, imposing a higher tax rate on those who have little, and effectively reducing the tax rate on those who have more.  The next blog will investigate the monthly tax return called a "prebate" designed to replace the lost deductions and exemptions, and make taxing consumption fair for all Americans.

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