Comparing two tax systems

Taxes can be collected in a number of ways: tariffs, value added tax (VAT), flat tax, negative income tax, consumption tax and income tax. Some 20 years ago, politicians were touting a flat tax as a way to simplify the tax code, revive the economy and promote growth. At about the same time, a consumption tax called “Fair Tax” (HR25) was introduced in Congress. The plan was to have one of these taxes replace the current income tax system. Let’s compare the two. Features of the Fair Tax will be stated first, followed by those of the flat tax.

1. Fair Tax is revenue neutral with the income tax; flat tax is not. 2. Fair Tax eliminates the IRS and all taxes on income. Flat tax does neither. Eliminated taxes are: income tax, Medicare and Social Security taxes, self-employment and alternative minimum taxes, corporate and business income taxes, taxes on interest and dividends.

Flat tax keeps all current taxes and the IRS. 3. With Fair Tax, we keep 100% of our salaries; not with flat tax. 4. Because Fair Tax has removed the corporate and business income tax, the 23% tax already present in all new goods and services is also eliminated. Fair Tax replaces that tax with a 23% consumption tax, keeping prices the same.

At this point, new goods and services will have the 23% sales tax embedded in their prices. There are no exceptions or carve outs. All spending will send 23% to the Treasury Department minus 1/4 of 1% to retailers as a service charge. Contrast that amount with the billions we spend in compliance costs under an income tax or flat tax.