The Fair Tax Plan is a very desirable tax reform plan, but I think it has serious flaws. Here's how I would change it.

In my previous post, “How to get rid of the IRS”, I referred to the Fair Tax plan.  The bill,  Link to HR 25, Fair Tax Act of 2013 has about 64 sponsors in the House, is stalled in the House Ways and Means committee, won’t pass.  Possible reason: it has some provisions I consider hokey or scary, and maybe others do as well.  I’d like to offer some changes which I think would simplify the Fair Tax and make it more workable.  Maybe if you read further, you will agree with me.

We need tax reform.  The IRS has become the political arm of the Democrat Party, harassing conservative donors (to Romney, last election) and organizations.  Even if they straighten out and regain impartiality, the tax system has become onerous.  There are several proposals for reform, all involving drastic simplification.  The flat tax, for example, would eliminate most deductions and hit the earner’s income with only one or two rates.  But the simplest tax possible is a tax on consumption rather than earnings.  The Fair Tax Plan is a package based on a tax on sales.

Features of the Fair Tax Plan (HR 25) as proposed:

   1. Sales tax of 23% eliminates all federal taxes on income.  The rate is a combination of the lowest tax rate on income now (15%) and the FICA tax (7.65%).

   2. Everyone receives a prebate, paid to the taxpayer family by the federal government, of the spending allowance times 23%, paid monthly.  Prebate explained.

   3. Imported goods will be taxed.

   4.  Services will be taxed.  The guy who mows your yard will add the Fair Tax to his bill.

   5.  Used goods will not be taxed.

   6.  Businesses may purchase goods and services without paying the tax.  This will lower their cost of goods sold and the price charged to the consumer.

   7.  The 16th Amendment to the Constitution would need to be repealed, so that the government could no longer level taxes on income.  We don’t want to end up with both.

These features are thoroughly discussed in the Frequently asked questions (FAQ).

Here are my thoughts on the features:

   1.  Big ticket items, such as homes and cars, would be much more expensive.  I think anything that comes with a deed or title should have a maximum tax of 5  to 10 percent, and I’d prefer 5%. 

   2.  I don’t like the prebate idea at all.  I don’t think the government needs to pay anyone anything.  People below the poverty line could just have slightly improved income.  They will still have food stamps, housing support, etc.  The prebate is a really bad idea.

   3.  Don’t charge tax on rent.

   4.  Allow the tax on real estate or other big ticket items to be financed with the mortgage.

   5.  I believe the 23% rate is too high.  I think it should be a few points lower.  Don’t forget, the advocates of the Fair Tax (rightfully) claim the economy would run much better under Fair Tax.  Many more people would be paying the tax.

   6.  I would tax resale of used big ticket items – again, anything with a deed or title – at the 5 to 10% rate I previously advocated.

   7.  I would treat businesses a bit differently.  If they manufacture, I wouldn’t tax their raw materials, but everything else they buy should be taxed, in my humble opinion.  There may be good arguments for letting them pay no tax on anything, but that just provides a way to cheat the system.  Everyone would incorporate.  It’s much simpler to let them be tax free on raw materials only.

   8.  I think you’d have to have very severe penalties for cheating the tax, particularly on corporations.

I think the results of implementing the Fair Tax would be awesome, particularly if my changes were incorporated.  By awesome, I mean awesomely good, not awesomely bad as in the present system.