A Change We Really Need

There's a bill that's been kicked around the House for about ten years. It's only got about 50 cosponsors so far. which is a far cry from the 220 it needs to pass. A lot of people don't know about this bill, and a lot of the people who have heard of it have been misinformed. What's bad about that is that this may be the single most important bill of at least the least forty years--H.R. 1025, the FairTax Act.

I don't know how much you've heard about the FairTax, but I'm going to start from the assumption that you know nothing, because it's easiest to explain from the bottom up. Currently, embedded in the price of everything you buy, is a federal tax. You don't know this, because the federal government doesn't tax your purchases directly. However, it taxes the capital and payroll of every entity involved in the production of whatever it is you're buying. Those entities factor those taxes into the price of the goods they're selling--so, whenever you buy something, 22 percent of the price goes to pay federal taxes. The FairTax would completely eliminate all federal income, payroll, capital, and estate taxes. It would replace them with a national 23% sales tax, to be embedded in the price exactly like the embedded taxes now. The tax on your purchases would not increase (well, by 1% of the total price, but not by any significant measure), but the taxes on your paycheck would disappear, leaving more money in your pocket.

Sound too good to be true? It's not. Everybody wins.

Under the current tax code, while the poor are exempt from income taxes--and many actually get refunds on the income taxes they don't pay--those poor with jobs are still hit with payroll taxes, often as high as income taxes. The FairTax eliminates that. Any potential changes in the price of goods won't significantly affect the poor either. See, part of the FairTax Act includes a provision that a credit be granted to every American--regardless of income--up to the poverty line for their family size. For example, a family of four is calculated to need about $2,000 a month to afford basic necessities like food and clothing (not designer clothing, mind you, but enough so that the kids aren't naked in the street). Under the FairTax, that family of four would receive almost $500 a month--enough to cover the tax on their basic necessities. If you buy beyond what you basically need, you will be taxed--if not, you won't. (And I don't care how poor you are, if you can buy the iPod you can pay the tax on it.)

Americans who make enough money to be hit with income taxes--most of whom also pay punitively high payroll taxes--will have all of their income available. Next time you get paid, pay close attention to how much the government took out for Medicare, Social Security, and income tax. Imagine what you could do with that extra money. I know for me, federal taxes typically run about $80 a month (during school when I'm part-time) and $150 (over the summer). If the FairTax passes, I could take that $80 and spend it, and the feds still get their hands on it; I could invest it; I could put it toward retirement or grad school. It's a lot harder to invest and save when the feds confiscate a quarter of your income right off the bat.

The current tax code punishes the wealthy. While a few people are wealthy for no reason, most of them got there by hard work. In the process, they created millions of jobs. Say you've got a CEO who makes $20 million. His lowest-paid employee makes $20,000. You can scream that it's not fair the CEO makes 1,000 times as much as the lowest-paid employee...or you can see it as, if that CEO weren't operating this company, the job wouldn't be there and the lowest-paid employee (and a few hundred similarly paid employess) would be making nothing at all (which last I checked would be a bad thing). But under the current tax code, those successful, job-creating wealthy people are being punished for their success. The income tax rate for people who make over $197,000 per year is 38%. On top of that, they have payroll tax (another 8%), capital gains taxes (about 35% of the company's capital)...and they're now being threatened with another tax hike from the Obama administration. Put yourself in those (ridiculously expensive Italian) shoes. If the government already confiscates half your income and a third of your company's capital, and then the incoming vice-president says if you don't give more you're not patriotic...well, Ireland's 12% capital tax is starting to look mighty attractive, isn't it? And when the wealthy move their assets to other places with lower taxes, who loses? The millions of people who work in jobs the government just taxed into relocation. By punishing the wealthy, you eventually punish the poor...and why, exactly, should success be punished in the first place?

I mentioned Ireland. When the rest of Europe was taxing businesses at a rate between 40 and 50%, Ireland slashed their capital tax to 12. Ireland now has the fastest-growing economy in Europe and one of the fastest in the world. It's cheaper to do business there, so more businesses go. If Ireland's economy exploded from dropping capital taxes to 12, what would happen if America cut them to 0? An economic explosion unlike any seen since the Industrial Revolution. And isn't this the best time for it? If unemployment is at its highest in decades, and the economy is in worse shape than it's been since the Great Depression, wouldn't this be an absolutely great time for unprecedented economic expansion?

The FairTax would not reduce the government's revenue. It would, in fact, increase it. Think about it. Every year, millions of tourists come here from other countries. Their income, of course, is made in their home country, and we can't tax them for it here. But they do spend here. And if the feds collected taxes on everything foreign visitors purchased, their revenue would spike sharply. Then there's the underground economy. People who make money illegally--drug dealers, prostitutes, illegal immigrants, etc.--obviously don't report their incomes at all. Then there are people--like waiters or strippers--who make most of their money in cash tips and can easily underreport by thousands of dollars their actual income. All of those people can escape the income tax. But since they spend their money on the free market, they cannot avoid the FairTax. A drug dealer doesn't report their income--but they pay for everything from bread to cars just like everyone else (well, almost--very few other people walk into a car lot with rolls of $20 bills), and even if they make money illegally the FairTax will collect their share. Another thing to consider is that the estimated cost every year of Americans trying to comply with the tax code (at last count over 47,000 pages long) is over $400 billion--spent on everything from individuals going to H&R Block to corporations hiring tax lawyers to double-check the books. Think how much good that money could do in the market. This country could do a lot with an extra $400 billion.

The FairTax is simple. There's no 47,000 pages to remember. H.R. 1025 is only 133 pages long. You want an honest assessment of how complex the tax code is? IRS bureaucrats tested their employees by calling their own support line with a serious question. In over 60% of the cases, the IRS support employee answered wrongly or said some variation of "I don't know, let me get a supervisor." Can you imagine if 60% of police officers couldn't answer a question about traffic laws?

The FairTax will help secure the border. See, the prebate credit--the one that covers taxes on poverty-level spending--can only be sent to people who are registered as citizens or legal guest workers. Illegal immigrants will still pay the FairTax, because they will still buy things. But they won't get a credit to cover their basic expenses. Guest workers, on the other hand, who come here legally, announce their presence, and may eventually become citizens, will pay the FairTax and receive the benefits of paying it. That alone will not stop illegal immigration--but it does make it harder for those who ignore our laws to make a living off our system.

Unlike the income tax, the FairTax's tax base is much mroe stable. See, income tax only hits income. The FairTax is based on spending. And spending comes not just from income but from savings and credit. When some catastrophic event--like 9/11 or Bailout Madness--wipes out a lot of income, spending takes a dip--but nowhere near as sharp as the one income takes, because people use their savings and credit to continue buying things. Tax records bear this out again and again.

Under the current system, America is one of the only countries that taxes goods produced in the country, rather than those sold in the country. This puts imports at a huge advantage. They have no real tax burden in their home country--which is smart enough not to tax exports--and because the goods were produced elsewhere, they have no real tax burden in America either. Our goods, on the other hand, are taxed here--then taxed again when they're sold in another country. Why on earth does anyone think it's a good idea to put our goods at a 20 to 40% disadvantage in the world market?

The FairTax has no deductions. That may sound bad, but here's why it's not. Tax deductions are never "free rides." They are intended to encourage or coerce people into doing what the government wants. And who comes up with tax deductions? K Street lobbyists hoping to game the system. Environmental lobby pressures a representative? Now there's a tax break for hybrids. (I don't know if there actually is, that's hypothetical.) Government wants to make sure your kids are under their direct supervision from the age of four (thanks to the horrendous system of compulsory government education)? Tax break for your children in government schools. Do you really want the government to be able to guide your behavior with tax credits? It's like leading a cat around with a catnip mouse; since cats don't respond well to commands or physical coercion, hold up a catnip mouse (or tax credit) and pull it one way or the other, and the cat will follow.

The current federal tax system encourages spending and discourages planning for the future. Investments and savings can be taxed. Spending cannot. The FairTax reverses that. You see the results of spending beyond your means everywhere. By not taxing savings and taxing spending significantly, the FairTax provides a benefit to responsibility (or, I should say, an immediate benefit to responsibility--responsiblity has always had long-term benefits). That's good for everyone. And before you accuse me of hypocrisy, it's not the same principle as the government promoting desired behavior with tax breaks. See, the FairTax doesn't punish spenders to encourage saving--the tax on purchased goods does not increase. The only change in the tax on goods is where it comes from. Right now, every business involved pays the taxes to the government--then you pay the business' share of the taxes, in addition to their materials and labor. Under the FairTax, you pay the government directly, which may seem like a tax hike--but you're already paying the taxes, you just don't see it. The FairTax doesn't tax spenders any more than the income tax (in fact, less, because you don't have taxes automatically withheld). It just stops taxing savers and investors. It's not a way for government to entice people to save, but a way to stop enticing people not to save. And that's good.

The FairTax also encourages people to become politically aware and active. That's a good thing. An apathetic, unaware populace--the dumb masses or sheeple--is easy pickings for power-hungry political hacks. (Even worse is an unaware populace that is nonetheless quite enthusiastic about something--witness the four people who came in my precinct on election day asking what the black man's name was, because they wanted to vote for him.) When you never get the money the government confiscates, it's hard to feel passionate about it. Be honest, even if you read the taxes on your pay stub, you normally think of your take-home pay as your salary. But when every time you buy something, it says on the receipt "23% FairTax....$4.98" or whatever, you start really feeling how much money is being taken by the government. And then you might get a little more upset when you hear about the forty-seventh public works project in West Virginia named after Robert Byrd and paid for with federal taxpayers' money (the count as of 2006 was over thirty, including the Robert C. Byrd Locks and Dam, the Byrd Aerospace Tech Center, the Robert C. Byrd Green Bank Telescope, the Robert C. Byrd Visitor Center at Harper's Ferry National Park, the Robert C. Byrd Federal Courthouse, the statue of Robert C. Byrd in said courthouse, the Robert C. Byrd Clinical Addition to the Veterans' Hospital, etc.).

I lied to you earlier. I said everybody wins. There is a group of people who lose. The lobbyists who want tax policy to coerce desired behavior. The politicians who use tax policy to exercise power over their constituents. The hacks like Robert C. Byrd who count on an apathetic people not to notice he's appropriated over $200 million of your money to name a bunch of crap after himself. The credit card companies who want you to spend money you don't have, so they can hold a sword over your head for decades. The drug lords who collect benefits like welfare and Medicaid without contributing a dime to the system. The foreign countries whose economies have been killing ours because of the simple fact that they understand you can't tax the successful into oblivion. Those are the only people who benefit from not implementing the FairTax. Do you want the political class and the illegal-income class to win? Or do you want the rest of America to win?