Tuesday, July 16, 2024

FairTax 101: Making America Great Again

President Trump recently floated the idea of eliminating the federal income tax. That tax became a fixture in 1913 when Congress ratified the 16th Amendment. The first U.S. Tax Code was about 400 pages. Today, with everything included, it’s more than 70,000 pages! Initially, the income tax was 1% on all incomes above $3,000 ($95,000 in today’s dollars) and applied to only 3% of the population. Today, the graduated rates start at 10% for families earning more than $30,000 and go up to 37% for families earning above $609,000. The rates vary greatly: The top 1% of taxpayers pay 45% of all income taxes, the top 25% pay 89%, and the bottom 47% pay 0%.

Trump understands that the tax system is a yoke on the neck of American prosperity. According to the National Taxpayer’s Union, Americans spend approximately $260 billion a year complying with the federal Tax Code, most of which goes into the pockets of accountants and lawyers. And that doesn’t count the countless billions businesses spend adjusting their operations to reduce their tax burden in the first place.

Trump has floated the idea of replacing the income tax with tariffs on imports. That’s neither feasible nor a great idea, but the notion of scrapping the current system is a compelling one, particularly if it eliminates the IRS. There’s a great (albeit not perfect) replacement for our current system, one that would replace the current dysfunction and replace it with something that would give the American economy a much-needed jolt: The FairTax.

Basically, the FairTax replaces all federal taxes, including Income, Corporate, Social Security, and others. It replaces all of them with a single retail tax to raise a similar amount.

Here’s an example of how it works: Let’s assume it costs $1.00 for a loaf of bread. According to the people at FairTax.org, $.22 of that $1.00 represents the aggregated federal taxes paid by the baker, distributor, retailer, and every other entity who had a hand in putting that bread on the shelf, including the individual income taxes their employees pay. The bottom line, though, is that you’re paying $1.00 for a loaf of bread.

Under the FairTax, all those aggregated taxes would be eliminated. The loaf’s cost would then be $.78, which includes all the inputs and profits from the farmer, distributor, retailer, etc. At retail, the tax would be $0.23, making the bread’s price $1.01, which is almost the same as before.

But here’s the kicker: Under the current system, when you earn $1.00, you only have between $.63 and $.90 cents left after taxes with which to buy that bread. Under the FairTax, when you earn $1.00, you have $1.00 left after taxes. (You can find the extra penny between the couch cushions!)

Given that the bread’s price stays basically the same, one might ask, “What’s the point?” Well, there are many beyond that whole paycheck in your pocket.

1. Spur Investment in America:

America could use a real shot in the arm. GDP growth is miserable (currently 1.3%). “But at least it’s growing,” you say. Not really.

The government will print (borrow) $1.2 trillion this year to pump into the economy, which will likely come in at about $28 trillion. So, basically, the government is adding 4.2% to the economy via debt, which will have to be paid back, even as GDP grows by less than 1.5%! That’s not real growth. The FairTax would fix that. There’s no single thing Congress could do that would more effectively spur investment in the American economy.

The average corporate income tax around the world is 23%. By eliminating federal taxes, Congress would make America an investment magnet. Currently, the world invests $1.2 trillion across national borders annually, $400 billion of which comes here. (While immigrants send $800 billion out of the country annually.)

By dropping the income tax to zero, America would spur companies worldwide to prioritize investment in the United States and create millions of new jobs. At the same time, it would motivate American taxpayers to bring home most of the $4 trillion they hold offshore, as would US corporations that hold additional trillions of dollars outside the country. Both would spur investment and create jobs.

2. Spur Entrepreneurship:

American employment is driven by small businesses that are mostly owned by individuals who report their income on their personal tax forms. By eliminating federal taxes and allowing entrepreneurs to keep more of their money, the FairTax would spur more Americans to become entrepreneurs.

3. Increased Competition and Innovation:

As efficiency returns to the market and more entrepreneurs are motivated to start businesses, competition will increase, which leads to more innovation and lower prices. Consumers will not only keep more money in their pockets, as competition drives down prices, those same dollars will buy even more.

4. Limit Congresses’ Power:

Eliminating the Tax Code would remove Congress’s ability to use it to punish disfavored industries and reward pet projects. Lobbyists would inevitably lose much of their power, as a significant amount of lobbying is predicated on enticing Congress to write industry-favorable tax laws.

5. Collect Taxes from Underground Economy:

Everyone who shops would pay the FairTax, including those in the underground economy who currently pay little or no taxes, such as illegals, drug dealers, or employees who are paid in cash.

6. Eliminate the IRS:

Does this need any elaboration?

7. Spur investment and innovation:

By taking the yoke of the Tax Code and IRS off the neck of individuals and businesses, the FairTax spurs investment and innovation. That puts the United States on the strongest economic footing possible on an increasingly competitive global stage.

8. Gives people their time back:

The FairTax frees individuals and businesses to focus 100% of their attention on starting, running, and expanding their businesses rather than contemplating countless tax consequences for every move.

9. A Boost for the Poor:

The FairTax gives every household a “prebate“ equal to the tax a person living on the poverty line would pay. As a result, every family in America who’s living at the poverty level would essentially receive a 22% increase in their income.

The FairTax is not a panacea—just ask the WSJ. It won’t solve all of America’s problems, and it won’t balance the budget, rein in government spending, or eliminate the vagaries of the business cycle. Some employers may try to reduce wages, which will spur labor disputes.

Those issues pale, though, when compared to the FairTax’s greatest benefit: It will begin reining in the imperial federal government, thereby taking the first step in returning America to its true foundation. That foundation is an understanding that the primary function of government is to protect its citizens’ freedoms and allow them to pursue prosperity and happiness unfettered by the tyranny of an oppressive state. Such a resurrection of the 10th Amendment would by itself make the FairTax a worthwhile endeavor and, indeed, go a long way to Making America Great Again.