Fair Tax Rebates

In my last post I introduced the Fair Tax - the replacement of the current income tax system with a national retail sales tax (NRST). Part of this plan includes a rebate, actually, a pre-bate. In this post, we'll discuss this important issue.

The purpose of the rebate is to prevent the imposition of the NRST on life's basic necessities. The rebate will allow for the purchasing of necessary items, such as food, clothing, medicine, shelter, without the burden of an included tax. The size of the monthly rebate will be determined by the government's published poverty level index for a particular household size, multiplied by the tax rate.

For example, using the Department of Health & Human Services’ poverty level index, a married couple with two children spends $25,660 per year on the basic necessities of life. What the rebate does is refund the amount of the NRST on this $25,660 in equal monthly payments. If the tax rate were 23%, then $5902 of this $25,660 would be tax. When divided by 12 months, this results in a monthly rebate of $492. If your family is bigger or smaller, the rebate would change accordingly. And the best thing, in my mind, about this rebate is that it applies to every household. So a household of 4 making $100,000 a year gets a monthly rebate of $492. A household of 4 making $50,000 a year also gets a monthly rebate of $492.

A couple of standard questions usually come up at this point?

1. Why not exempt things like food or medicine rather than provide this rebate?
While food and medicines and clothing are certainly necessities of life, they're only necessary up to a point. Someone who is in the habit of frequently entertaining guests is certainly purchasing more food than is necessary for their household. Should all of this "extra" food be exempt from the tax? Likewise, some folks like bluejeans, some folks like Pierre Cardin. Should someone who buys expensive clothing far and above what they "need" get these things tax exempt? Most would say no. So, rather than relying on some subjective source (such as a retailer) to say this is necessary and this is excessive, the rebate is used to equalize the playing field. Also, exempting one type of product and not another opens up the issue of Congressional meddling ... just like in the present tax system. Some interest group will lobby for their products to be tax exempt and the tax code will be adjusted here and there and pretty soon we've got just as big a mess as we have now. With no exemptions and a rebate, all retail items are equally subjected to the NRST.

2. How will the rebates be distributed?
With 21st Century technology, the methods of distributing this rebate are quick and efficient. The government already distributes social security benefits to millions of recipients via direct deposit and mailed checks. Welfare benefits are paid using incremental debit cards - i.e., each month the balance on the card is incremented by that month's benefit. There's no reason to believe that the rebates provided under the Fair Tax plan can't, and won't, be distributed using these same methods.

Convinced yet?

Well, to help you along in your transition, my next post will do a quick comparison of the Fair Tax, the Flat Tax, and the current Income Tax.