(02/27/06) Albert Einstein said “The hardest thing in the world to understand is the income tax.”We all hate to see April 15th come each year. Most of us spend hours preparing our tax returns or have someone prepare them for us. It is estimated Americans spend $265 billion or 6 billion hours a year preparing tax returns. The income tax code, with its many deductions, exemptions and credits, is so complicated that even the preparers need annual training to keep up with changes. Such complexity also contributes to the $345 billion in taxes owed and not paid – resulting in the average tax bill being over 30% higher than it would otherwise be if everyone paid their fair share.
President Bush was silent on the issue of tax reform even though he created a bi-partisan advisory panel last year to make the tax code simpler, fairer and revenue neutral. Failure of the Administration to address tax reform will affect our global competitiveness. We can no longer afford a system that’s influenced by special interest deal makers who lobby to preserve or add tax breaks or shelters for their clients. There’s consensus about the need for a fix but there’s considerable disagreement on the appropriate remedy.
Shouldn’t the tax code be easy to understand, fair and pro-growth? The reform approach, called The FairTax, is. It replaces all federal income and payroll taxes with a progressive national retail sales tax. Recently, former Federal Reserve Chairman Alan Greenspan noted the benefits of a national retail sales tax would boost the national savings rate and overall economy.
The FairTax, introduced by Rep. John Linder (R, Ga.), is very simple. All federal income taxes, personal, gift, estate, and capital gains taxes, alternative minimum tax, Social Security, Medicare and business taxes are replaced by one simple, visible, federal retail sales tax on new consumer goods and services. The tax would be collected by our Vermont department of taxes at the point of sale.
There would be no tax on the purchase of used goods or on the purchase of items for production or resale. The amount consumers pay to fund government would be totally visible and taxed once on goods and services used for personal consumption.
The FairTax is collected only on what we choose to spend, not on what we earn. It doesn’t raise any more or less revenue than the amount collected today by the IRS.
By stripping out hidden federal income taxes and compliance costs estimated to be over 23% the FairTax makes U.S. goods more competitive oversees and more affordable at home. This will increase job creation while sharply reducing our balance of payments deficit.
The FairTax is easy, efficient, transparent, and an intelligent solution to the frustration and inequity of our current tax system. It abolishes the IRS which has a $9.8 billion budget and 98,735 employees who would be eliminated. With no need for income tax withholding and payroll tax deduction, employees would get 100 percent of what they earn.
Visualize our government not having to deal with oversees shelters anymore. The FairTax taxes the trillion-dollar underground, criminal, drug and porn economy. Whenever something is purchased the national sales tax is collected regardless of the source of income.
Under the FairTax system, you only pay for what you consume. If Bill Gates wants to spend $10 million for a yacht, he’d pay a national sales tax of $2.3 million. The FairTax system doesn’t penalize people who want to save since it is collected only when they decide to spend. To ensure no American pays taxes on spending up to the poverty level, a monthly rebate is also provided. That means the first $19,600 earned and spent by a couple is tax free.
Tax reform is occurring around the globe. Many Eastern European countries have reformed their tax system by implementing a flat tax. Competition is the driving force and their tax systems are very simple, less regulatory and transparent. However, the flat tax has the same drawbacks as the current tax system including continued withholding, filing tax forms and it’s still open to manipulation by special interests. It also leaves in place the regressive payroll tax.
National polls show that more than two-thirds of Americans want fundamental tax reform. For an income tax system that’s easy, fair, pro-growth and abolishes the IRS, the FairTax should be seriously considered.
Frank Mazur
South Burlington* * * Frank Mazur, a small business owner and former state representative, is chair of the advisory board of Vermont FreedomWorks.