TRANSITION TO THE FAIRTAX
A woman rubbed a bottle and out popped a genie. The genie said, “I'm a one-wish genie. So...what'll it be?"The woman did not hesitate. She said, "I want to replace the income tax with the FAIRtax. This move will allow the people to TAKE BACK CONTROL and help all Americans."
The genie looked at the FAIRtax legislation and exclaimed, "Lady, be reasonable. The people in D.C. use the income tax to control people and extort money from lobbyists. I'm good but not THAT good! Make another wish and please be reasonable."
The woman thought for a minute and said, "Well, I've never been able to find the right man. You know - one that's considerate and fun, likes to cook and help with the house cleaning, gets along with my family, stays in shape, doesn't watch sports all the time, and is faithful. That is what I wish for...a good man."
The genie let out a sigh and said,
"Let me see the FAIRtax legislation again."
Replacing the income/payroll tax with the FAIRtax is becoming more possible as more people see the truth—the income/payroll tax system only works for people in D.C. and their friends.
One of the questions to answer is what happens when the income/payroll tax system is replaced by the FAIRtax. Fortunately, this has not only been thought through but is very straight forward.
This article below is written by Karen Walby, PHD. Dr. Walby is the research consultant for Americans For Fair Taxation.
FAIRtax Transition Issues
What is transition?A term that often arises in tax reform discussions is the need for transition relief. “Transition” is defined by the Cambridge American English Dictionary as “the process of changing, or a change from one form or condition to another.” Thus “transition relief” consists of provisions to protect taxpayers from financial harm and to avoid economic windfalls arising solely from the tax law change.
When changing one tax system for another, especially in a revenue-neutral manner, policy makers should consider that there is adequate time for implementation and to minimize economic hardships taxpayers may encounter in transitioning to the new tax system. At the same time, to realize the economic growth benefits of the reform, such transition relief should be based on the criteria of simplicity, efficiency and equity of the tax system.
The transition rules, in themselves, should not introduce any major new complexity in the tax law. To the extent possible, transition rules should not require that taxpayers supply additional data on financial transactions or asset values. The transition rules should be designed to minimize the probability of action in response to special features of the change from one set of tax rules to another. In particular, there should not be special inducements either to buy or sell particular kinds of assets just before or after the effective date of the new law.
Transition under the FAIRtax
The FAIRtax legislation (HR25) changes the federal tax system from one based on income to one based on consumption – a major change. This article addresses the major transition issues but is not a full enumeration of them.
The complete switch from income to consumption, however, does have advantages with regard to the need for transition relief compared to a “flat tax” which still taxes income and payroll. Transition issues under the FAIRtax are more easily handled than under a flat tax. The FAIRtax completely eliminates all taxes on business or personal income; businesses and individuals will no longer be paying these taxes. This minimizes any concern with loss carryovers from the existing system or other unused income tax credits or deductions. With respect to unused income tax credits and deductions, some form of transition relief is appropriate under a flat tax or other reformed income tax, since firms and investors are going to continue paying tax. Under the FAIRtax, corporations and investors don’t need transition relief; after all, how can a corporation or an investor be worse off because it has been relieved from having to pay income tax altogether?
With respect to property owned when the sales tax is enacted, the FAIRtax exempts the sale of used property from tax as the simplest approach. The upshot of this is that market demand will likely bid up the price of used property, especially homes, until the price of the exempt used property (adjusting for wear and tear) is nearly the same as the cost of new taxable property which is subject to the FAIRtax. Taxing used property as well as new property would eliminate these windfall gains; however, it would violate a basic tenet of the sales tax: that the value of the property be taxed once, and only once.
No transition relief is necessary for savings distributed from pension plans, IRA’s and other qualified retirement plans because, except for Roth IRA’s, neither the contributions nor the accumulated earnings in the plans have previously been subjected to income taxation. Under the FAIRtax, income-earning assets and distributions from retirement plans that are currently subject to income tax will not now be paying tax, causing the market value of these assets to climb considerably to reflect the higher rate of return resulting from the repeal of the income tax.
And finally, the FAIRtax legislation also adjusts the Social Security benefits indexing formula, commonly known as the cost of living adjustment or COLA, so that Social Security benefits increase to the extent, if any, that the federal sales tax results in higher costs to seniors. This preserves the purchasing power of seniors under the FAIRtax. Additionally, the FAIRtax does not tax Social Security benefits or investment earnings received by seniors. Nor does it tax the employment payroll of seniors who must work to supplement their retirement income.
FAIRtax Transition Rules
Transition rules specify the temporal conditions under which specific tax provisions former apply. The FAIRtax does incorporate three expressly stated transition rules in HR25: a transitional inventory credit, a deferred effective date, and phase out of the IRS.
First, since inventory is not deductible under the income tax until it is sold, existing inventory will have been acquired with after-tax dollars. To then subject inventory held prior to the effective date of the FAIRtax to a sales tax would constitute double taxation and disrupt markets. Businesses that have inventory held on the date prior to the enactment of the FAIRtax qualify for a “transitional inventory credit” if the inventory is sold subject to the FAIRtax within a two year period. Qualified inventory shall have the cost that it had for federal income tax purposes for the active business as of the end of the final income tax year. The credit is equal to the cost of the qualified inventory times the FAIRtax rate.
To ensure that the inventory credit can follow qualified inventory through the supply chains, businesses may sell the right to receive the inventory credit. The inventory credit indirectly allows for a transitional period for manufacturing and retailing to adjust to pricing without the inclusion of income and payroll taxes, corporate taxes, and compliance costs that before the FAIRtax were a large percentage of the cost passed along to the consumer. This means being able to keep some prices the same immediately after the effective date and then change prices over time, removing the inducement to buy or sell just before the effective date.
Second, the FAIRtax pushes forward the effective date in order to allow time for the economy to adjust to a consumption tax. The FAIRtax Act of 2021 would not take effect until Jan. 1, 2023.
Third, for an orderly end to the income tax system, the IRS is phased out within 3 years of the effective date of the FAIRtax. A phase out period is necessary to allow the processing of income tax payments and tax refunds for the final year of income/payroll taxes. At the end of the three year period, HR 25 provides that all tax records are destroyed and deauthorizes any appropriations for the Internal Revenue Service.
CONCLUSION
Dr. Walby’s article demonstrates that not only is there an efficient and well-thought-out process for transitioning but that it is provided for in the FAIRtax legislation.
The income/payroll tax system is broken and no longer working—we can’t repair it but we can replace it with the FAIRTAX!
Join us and TAKE BACK CONTROL OF OUR COUNTRY AND OUR LIVES—NOT WITH BULLETS BUT WITH THE ELIMINATION OF ONE OF THE BIGGEST THREATS TO OUR LIBERTY AND ECONOMIC PROSPERITY—THE INCOME/PAYROLL TAX.
WHAT CAN EACH OF US DO?
We can write letters and make calls to our elected representatives and attend Zoom town hall meetings demanding that if they really want to allow Americans to “TAKE BACK CONTROL”, the first step is to eliminate the income/payroll tax system and enact the FAIRTAX!
TAKE BACK CONTROL! Help us PASS THE FAIRTAX!
The IRS will be gone and we will pay our taxes when we make purchases.
WE and not the Ruling Class and their minions in D.C. will decide how much federal tax we pay!
WE will know how much tax we and everyone else are really paying because taxes will no longer be hidden from us. It will be clearly shown on every retail receipt.
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”
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