Trying to raise my kids the best I can

Monday, February 11, 2008

Why the fair tax isn't fair

The fair tax, or the flat tax, is a proposal to get rid of the current complicated tax code and turn it into a simple sales tax. There are some very appealing qualities to it. Namely the simplicity and the nakedness of it - we all would know exactly how much is going to the government. The legislature could no longer hide taxes like the gas tax.

I have a number of problems with the "unfair" tax however. The biggest problem I have is that the rich would actually be taxed at a lower percentage rate than the middle class because a) all inheritance money would be tax free and b) all money spent or invested in other countries would be tax free c) the poor have to spend their money immediately while the rich can save their money. The rich, therefore can defer taxes at their will.

A closer look at all the promises
The actual tax rate is not clear. Fair tax proponents say it will be 23%, but the President's Advisory Panel on Tax Reform says it will be 34%

Myth: It would simplify our complicated tax code.
Response: The only way the flat tax would get the support to pass into law is if there were some sort of concession to make it more fair for the poor. There are three ways of doing this, two of which would not simplify the tax code at all.  Either create several tiers of "luxury" with different sales tax rates which would create a lobbying nightmare. Or allow different sales tax rates for different income levels, which would mean keeping our current complicated tax codes (necessary for determining levels of income). The third strategy to make it more fair is a prebate (see next myth).

Myth: A prebate will keep the tax rate the same for the poor and middle class
Response: The current prebate proclaimed by fair tax proponents still does not equal out current tax policy for the lower class. Also: A prebate would cause a larger number of Americans to become dependent on an entitlement than ever before. Even though it is merely a replacement for the current policy- there is something debilitating about becoming dependent on a government check.

Myth: Drug dealers and other criminals would now have to pay taxes on their criminal activity
Response: If sales taxes are judged on income, their criminal activity (and taxation status) will still slide under the radar. Even if that is not the case, new and easier ways to elude the government will be created, like buying a $3 million dollar house but only claiming a $1.5 million sale. (Also, if sales tax is determined by income the rich could pay the poor to buy things for them.)

Myth: Used items won't be taxed
Response:  Used items via a store or dealership would have to be taxed at the point of sale, as would ebay, I'm sure. The only question is whether or not you'd have to declare "garage sale" type items or not. It is also notable that the inflated price of new items would naturally raise used prices.

Other concerns I have:

Unless tourists could be rebated, this new 23-34% sales tax will decimate our travel industry.

First time home buyers would be at a huge disadvantage - paying 1/3 more for their home than people who just bought their homes before the switch.



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