Changes in the American Tax System

[Ragoczy]

Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as is—only the way it is funded will change.

A specious argument -- the Fair Tax is not touted as solution to the Social Security problem by anyone, it simply replaces the collection method. Fixing Social Security is a separate problem -- and no proposed alternative to the Income Tax proposes a fix to Social Security.

If you want to argue that Social Security is broken and desperately in need of a drastic solution, I'll completely agree with you, but to use that as an argument against a taxation strategy is absurd -- the two have nothing whatsoever to do with each other.

The "underground economy" that income tax advocates complain about will certainly increase under the FairTax system. Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true, not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."

Patently false. The "underground economy" referred to is illegal activities. Under the Fair Tax, every dollar spent that was earned illegally will be taxed at the point of sale. When a drug dealer buys his Lexus, he'll be coughing up 23%. What you're referring to is the supposition that the Fair Tax will suddenly result in massive amounts of under the table sales in order to avoid the tax -- what you're argument fails to consider is the massive infrastructure necessary to support the sale of products in that manner. Sure, there will be "cash" sales of goods and services that stay off the books -- much as there are today in order to avoid the income tax -- but to have any significant impact would require massive "underground" markets. If someone opens a secret Best Buy out of their garage, I think it would be noticed.

The claim that the IRS will be eliminated under the FairTax is bogus. Although the national sales tax will be collected by the states from retailers, it is still a national sales tax, and as such, its collection will have to be overseen by some agency of the federal government. Just because the bureaucracy will no longer be called the IRS doesn't mean that it will be eliminated. According to The Fair Tax Act of 2005:

There's a huge difference in manpower and power of an agency needed to support a sales tax vs. income tax. Look at the tax enforcement agencies of States with only a sales tax vs. those with an income tax. The IRS elimination means that the days of individual Americans having to file on April 15th, having to keep records all year, having to fill out forms, having to call the IRS with questions that 50% of the time are answered wrong, of individual Americans having to face the full police powers of government in an audit -- are gone.

With the FairTax, the federal government will also be a tax collector in a new way: at the post office. There is no exemption of postal goods and services mentioned anywhere in the Fair Tax Act of 2005. I suppose this means that stamps, P.O. Box rental services, and package mailing services will be subject to the new 23 percent tax.

Oh, my god! You're right -- keep taking that $1000 a month FICA from me, 'cause I don't want to pay an extra penny on my stamps!

I ask: "So what?"

The FairTax is progressive. What could possibly be
fair about a progressive tax where some people have to pay a higher percentage than others merely because they are deemed to be "rich"? How is the FairTax progressive? I thought it was a flat 23 percent on all new goods and services? It is and it isn't. Under the FairTax plan, everyone pays the 23 percent tax on everything, but "every household receives a rebate that is equal to the FairTax paid on essential goods and services." The rebate is given out each month, and is based on family size and the poverty level. But like the current tax code, the FairTax can also function as a tool for income redistribution because "the poor [will] actually pay less than zero-percent retail sales tax on their spending. Much like with the earned income tax credit of today, the rebate may give them more money than they actually spend on retail taxes."

A very small percentage of Americans who make less than the Poverty Index will receive a very small amount more in the prebate than they pay out in taxes. Even as a pretty hardcore Capitalist, I'm okay with a family of four living on poverty-level income paying no taxes. I'm okay with that family even getting a little extra out of the prebate. Precisely because the poor spend a higher percentage of their income on retail goods and services -- if it were simply a consumption tax without the prebate, then it would place a disproportionately high burden on the poor.

Under the Fair Tax, the poorest Americans are exempted from taxation and the the tax burden is based on how much you spend.