HOSTILE ARGUMENT: THE FAIR TAX WILL ADD A NATIONAL SALES TAX ON TOP OF STATE SALES TAXES
Today, we continue a series of articles about handling attacks on the FAIRtax. We often hear that the FAIRtax will add a federal sales tax on top of the state sales taxes that we pay today.
While the FAIRtax is technically a new tax in that it does not exist today, it does not impose an additional tax burden on anyone. The FAIRtax REPLACES the income and payroll tax. So, the proper comparison is how much federal tax you’ll pay under the FAIRtax vs. how much you pay in income and payroll tax. With the FAIRtax designed to raise the same amount of money for the government as the income tax, but spreading the tax burden across a larger tax base, most people will actually pay less in federal taxes with the FAIRtax.
We have already heard the bogus argument that the FAIRtax will add 23% to the cost of everything we buy, including groceries, gasoline, and clothing. With the FAIRtax, goods will become more affordable because the pre-tax prices will drop. Businesses will no longer pay the employer portion of the payroll tax or the corporate or business income tax, and companies will save significant compliance costs from today’s tax code. With competition, businesses will pass most of these savings to the consumer. Goods will also be more affordable because the consumer will see relief from payroll and income taxes.
There will be an adjustment because most states base their income taxes on the federal system. If the feds drop the income tax, the states may follow suit and replace their income taxes with sales taxes. The FairTax helps states with conforming state sales taxes to collect from out-of-state sources.
Critics will still argue that the combined effect of a federal sales tax, such as the FAIRtax, and state sales taxes will produce high rates and tempt more people to evade taxes. As noted above, the FAIRtax will replace the costs of the current income tax system that are hidden in today’s retail prices. Consumers will not see a dramatic rise in prices when the FAIRtax takes effect.
Several features of the FAIRtax discourage evasion. First, collection points drop from 155 million individual tax returns to about 20 million businesses, making the FAIRtax easier to police. I worked with the New Jersey Division of Taxation at the state Attorney General's office, and I know the Division of Taxation can quickly smell a rat when a seller tries to cheat on the state sales tax.
Second, it will take two taxpayers acting together—a buyer and a seller—to evade the FAIRtax. Few buyers and sellers inclined to evade tax will take the risk, mainly because the FAIRtax requires all sellers to register, whether or not they sell at retail. This provision in the bill opens the way for an audit trail.
Third, taxpayers under the FAIRtax will see buyers of big-ticket items paying tax and understand that the FAIRtax is fair. When taxpayers perceive that a tax is fair, voluntary compliance will rise.
Fourth, over eighty percent of retail sales in the United States are through chains and big-box stores with sophisticated point-of-sale inventory systems. These sellers are unlikely to evade sales tax, and the cashier will not risk her job—or jail—to make a deal with the customer to cheat.
Finally, as noted before, the FAIRtax replaces the income tax. If you’re going to argue against the FAIRtax on the grounds that it will encourage evasion, you’ll have to make the case that evasion under the FAIRtax will be more of a problem than it is under the income tax. With income tax evasion currently standing at around $1 trillion a year, that’s going to be extremely difficult to do. In fact, one study done by a professional CPA suggests that the FAIRtax will reduce illegal tax evasion by a whopping 95%.
The argument that the FAIRtax and state sales taxes will be high has emotional appeal, but little basis in fact. Still, overcoming this appeal will take effort. I would love to hear your suggestions for putting the response into a soundbite.
While the FAIRtax is technically a new tax in that it does not exist today, it does not impose an additional tax burden on anyone. The FAIRtax REPLACES the income and payroll tax. So, the proper comparison is how much federal tax you’ll pay under the FAIRtax vs. how much you pay in income and payroll tax. With the FAIRtax designed to raise the same amount of money for the government as the income tax, but spreading the tax burden across a larger tax base, most people will actually pay less in federal taxes with the FAIRtax.
We have already heard the bogus argument that the FAIRtax will add 23% to the cost of everything we buy, including groceries, gasoline, and clothing. With the FAIRtax, goods will become more affordable because the pre-tax prices will drop. Businesses will no longer pay the employer portion of the payroll tax or the corporate or business income tax, and companies will save significant compliance costs from today’s tax code. With competition, businesses will pass most of these savings to the consumer. Goods will also be more affordable because the consumer will see relief from payroll and income taxes.
There will be an adjustment because most states base their income taxes on the federal system. If the feds drop the income tax, the states may follow suit and replace their income taxes with sales taxes. The FairTax helps states with conforming state sales taxes to collect from out-of-state sources.
Critics will still argue that the combined effect of a federal sales tax, such as the FAIRtax, and state sales taxes will produce high rates and tempt more people to evade taxes. As noted above, the FAIRtax will replace the costs of the current income tax system that are hidden in today’s retail prices. Consumers will not see a dramatic rise in prices when the FAIRtax takes effect.
Several features of the FAIRtax discourage evasion. First, collection points drop from 155 million individual tax returns to about 20 million businesses, making the FAIRtax easier to police. I worked with the New Jersey Division of Taxation at the state Attorney General's office, and I know the Division of Taxation can quickly smell a rat when a seller tries to cheat on the state sales tax.
Second, it will take two taxpayers acting together—a buyer and a seller—to evade the FAIRtax. Few buyers and sellers inclined to evade tax will take the risk, mainly because the FAIRtax requires all sellers to register, whether or not they sell at retail. This provision in the bill opens the way for an audit trail.
Third, taxpayers under the FAIRtax will see buyers of big-ticket items paying tax and understand that the FAIRtax is fair. When taxpayers perceive that a tax is fair, voluntary compliance will rise.
Fourth, over eighty percent of retail sales in the United States are through chains and big-box stores with sophisticated point-of-sale inventory systems. These sellers are unlikely to evade sales tax, and the cashier will not risk her job—or jail—to make a deal with the customer to cheat.
Finally, as noted before, the FAIRtax replaces the income tax. If you’re going to argue against the FAIRtax on the grounds that it will encourage evasion, you’ll have to make the case that evasion under the FAIRtax will be more of a problem than it is under the income tax. With income tax evasion currently standing at around $1 trillion a year, that’s going to be extremely difficult to do. In fact, one study done by a professional CPA suggests that the FAIRtax will reduce illegal tax evasion by a whopping 95%.
The argument that the FAIRtax and state sales taxes will be high has emotional appeal, but little basis in fact. Still, overcoming this appeal will take effort. I would love to hear your suggestions for putting the response into a soundbite.
Jim Bennett
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