Fair Tax Complaints I

Let's take a look at some of the complaints that have arisen to the Fair Tax ... and see if there's any validity to this opposition.

1. The Tax Rate is Really 30% Not 23%
To this argument we simply say, well then, the 28% income tax bracket is really a 39% bracket. Regardless of how you want to calculate the percentage, for each $100 you spend at the retail level, $23 of that purchase is the Fair Tax.

2. Retail Prices Will Rise By 23%
Actually, retail prices shouldn't change much at all ... in fact, in some cases, they may actually drop. Why? Because everything you currently buy includes between 20 and 26% embedded taxes. Embedded taxes are that portion of the price of a good which is the direct result of the person selling and manufacturing it having to pay business income and employee payroll taxes. Once the Fair Tax is in place, neither the retailer nor the manufacturer will be paying these taxes. Therefore, their production costs will decrease. While they may try to keep their prices the same and "pocket" the difference, competition will quickly do away with this. Two recent examples demonstrate this. A couple of years ago a particular federal tax on the airline industry expired. At first, the airlines kept their prices where they were, even though they no longer needed to pay this tax. Then, one airline decided to lower their prices by the amount of this expired tax. Within hours, all the airlines had followed suit. More recently, one automobile manufacturer started offering "employee pricing" - offering their vehicles at the same discount price their employees received. How long was it before all of the major manufacturers were offering this same deal? Two weeks ... maybe three? Competition will drive down the prices and, when the Fair Tax is added to these lower prices, the net result should pretty much be a wash. Prices should remain at their current levels under the Fair Tax.

3. The Fair Tax would place a horrible burden on the Poor
Absolutely and completely false. Let's take a look at the poor ... those living below the poverty level but that actually have jobs. While they may currently pay absolutely NO income tax, they still pay Social Security and Medicare taxes. Under the Fair Tax, these taxes are eliminated so, as a start, the poor will get an increase in their take-home pay. And, if their employer chooses to pay them the employer's share of these taxes, they'll get an even bigger pay increase. Next, the poor will get a Fair Tax Rebate on all of their spending up to the poverty level. So, to summarize, under the Fair Tax a person living below the poverty level will pay ABSOLUTELY NO TAX!

4. The Fair Tax would place a horrible burden on the Elderly
Also bunk. For starters, the elderly would start to receive the rebate on their spending up to the poverty level. For those elderly who are receiving distributions from IRAs or 401(k) plans ... guess what? These distributions will be completely tax free under the Fair Tax. Right now, they have to pay income taxes. So, what about those who are only receiving social security benefits? They don't pay any income taxes on these funds. For them, they'll still pay no income taxes under the Fair Tax but, as we mentioned above, they'll also be receiving the rebate on their spending up to the poverty level. So they'll have more cash in their pockets, too.

More to come in my next post.