According to the Tax Foundation, (here and here) Americans spend approximately $300 Billion a year complying with the federal Tax Code. That does not include the taxes themselves, nor the costs borne in adjusting their business operations to reduce the negative impact of the Code in the first place. Another part of the Tax Code is the opaque nature of the individual taxes that eventually make it into the price of goods. Harvard economist Dale Jorgenson suggests that 22% of what Americans spend at retail is the cost of aggregated taxes. Now imagine, every one of those taxpayers or retailers has to try and comprehend their piece of that 60,000 page IRS Tax Code… a code that neither our Treasury Secretary, Timothy Geithner, (The guy the IRS works for!) nor Congressman Charlie Rangel (The guy who runs the committee that writes the Tax Code!) are smart enough to figure out... or that's what they claim.
Which brings me to the world’s best idea you may never have heard of… The Fair Tax. What is the Fair Tax? Basically it is a proposal where all current federal taxes: income, Social Security, Medicare, capital gains, etc… would be eliminated and replaced with a 23% tax that is added at the retail level. Below is a very simple demonstration of how the Fair Tax works.
Let’s assume it costs $1.00 for a loaf of bread. According to Jorgenson, $.22 of that $1.00 represents the aggregated federal taxes paid by the baker, the distributor, the retailer and every other person who had a hand in putting that bread on the store shelf. That includes not only their taxes, but also those they withheld from the checks of employees. The bottom line for you as a consumer however is that you pay $1.00 for a loaf of bread. (For ease of discussion, i.e. eliminating taking numbers to six decimal points, throughout this piece I use the Jorgenson’s 22% and the Fair Tax’s 23% interchangeably.) Under the Fair Tax, all of those aggregated taxes would be eliminated. As a result, the cost of the loaf would be 77 cents, a number which includes all of the inputs and profits from the Farmer, Distributor, Retailer etc. When 23 cents of taxes are added to that $.77, the price of the loaf of bread for you is the same, $1.00.
Given the fact that the price of the bread stays the same and all of the players who are involved in putting the bread on the shelves are making the same amount of money, one might ask “What’s the point?” Well, there are actually quite a number of them, not the least of which is the fact that you get to keep 100% of your paycheck. Under the current system, when you earn $100, you get a check for $75. Under the Fair Tax, when you earn $100, you get a check for $100. Below is a list of ten great reasons to implement the Fair Tax:
- 1. Keep your Paycheck:
- 2. Spur Investment in America:
- 3. Spur Entrepreneurship:
- 4. Limit Congresses’ Power:
- 5. Save Half a Trillion Dollars Per Year:
- 6. Focus Financial Decisions:
- 7. Increased Competition and Innovation:
- 8. Collect Taxes from Underground Economy:
- 9. Eliminate the IRS:
- 10. Boost for the Poor:
The Fair Tax is not a panacea. It will not solve all of America’s problems; it won’t cure cancer or eliminate war or the vagaries of the business cycle. Nor is it without debate, as can be seen by the fact that it has been attacked by players as different as the The Wall Street Journaland the not always so factual FactCheck.org.
Nonetheless, the FairTax does some important things. First, it put’s the United States on the strongest footing possible to compete on the global stage by spurring productivity across the spectrum of business and society. Second, it frees up individuals and businesses to focus 100% of their attention to starting and expanding their businesses in the most effective and efficient ways possible. In doing so they will drive employment and spur our economy. Thirdly, and perhaps most importantly, it would be the first step in reigning in the imperial federal government. By removing the exigencies forced upon them by the leviathanian Tax Code they created, and eliminating Congresses’ ability to manipulate that code, we would be taking the first step in returning America to its true foundation. That foundation is an understanding that the primary function of government is to guarantee its citizens’ freedoms and give them an opportunity to pursue success and happiness unfettered by the tyranny of an oppressive state. That alone would be make the Fair Tax a worthwhile endeavor.