The FairTax: All the Economic Stimulus We Need

If you haven’t heard of the FairTax by now, then you haven’t been paying attention to your government or those wanting to fix it. The FairTax is a system of taxation that is currently held up in Congress (H.R. 25). It is essentially a national sales tax, or as some people refer to it – a consumption tax. It’s a tax code that will replace our current system by eliminating the income, Social Security, Medicare, corporate income, self-employment, death, gift, and capital gains taxes. In place of all those will be a singular sales tax that is applied to every new product or service only once at the final retail sale to the consumer.

Essentially, the FairTax can be summed up in one word: revolutionary.

How is it revolutionary? Imagine if every citizen in this country no longer had to pay any federal withholding taxes. Imagine if the paycheck received by every working person in this country was no longer subject to confiscation and deduction by our government on Capitol Hill – before the worker even sees it. Imagine no longer having to file annual tax reports to the Internal Revenue Service and no longer fearing making a mistake by misfiling or being audited with the consequence of severe fines or jail time. Imagine making investments knowing that every dollar you put in will be tax-free when you withdraw it. Imagine having more power over your federal representatives, instead of succumbing to their demands.

You will no longer need to imagine these things if you lived under the FairTax plan. If you can imagine such a reality, then this plan should excite you and move you to action. The benefits will be felt immediately upon its implementation and it could save us from our economic decline, which may last for several years, possibly longer. Under this system, everyone benefits…except Big Government.

How can Americans benefit financially from the FairTax?

There are two simple answers. First of all, with no federal taxes taken out of our paychecks, every penny worked for is a penny in your pocket. If your gross pay is $1000 per week, then you will keep all $1000 (assuming there are no state and local taxes) – not a tax-deducted amount graciously bestowed on you by the federal government. Secondly, every penny invested is a penny kept. There are no tax penalties for saving your money or investing in the markets. Thirdly, with businesses gaining some tax relief from the system, employers will have more money to invest in human and material capital, which could translate into more jobs created and/or better pay and benefits.

How will the FairTax benefit businesses?

They will no longer pay taxes on capital investments. This includes all goods used for the production and delivery of their final product to retailers. If it is a corporation, they will no longer pay a corporate income tax. If you are self-employed, you will no longer pay the self-employment tax. Since employers will no longer have to worry about withholding taxes, they will not have to “match” their employee’s contribution – which means those costs will be eliminated from their final product or service. This will free up additional money for capital and other investments. A side effect will be an inevitable decrease in prices to the consumer and a consequent increase in sales. 

What will be the effect on the federal government?

They certainly will not be in the pocket of every American before we get to see our own earned paycheck. They will no longer be able to successfully use our tax code as a tool for demagoguery. The IRS would be virtually eliminated. Lobbyists certainly would not have the influence on our politicians that they have today. In essence, the federal government will lose a considerable amount of their power back to where it rightfully belongs – in the hands of the People. But unfortunately, their revenues will not be affected. This plan is designed to be revenue neutral, which means the amount the government gets today will be the same when the FairTax is implemented. However, with proper representation – and scrutiny of those representatives and their actions – we will have the ability to force the hand of Washington and demand fiscal responsibility.

How will the FairTax help our struggling economy?

It will undoubtedly give us a needed morale boost and an initial jumpstart in the investment markets. With more cash in the pockets of consumers and businesses alike, it will ease the minds of those who have been afraid to either spend or invest their money. It will also encourage investors from overseas to put their money into the American markets tax-free, giving us an even larger bottom-line for capital growth. And of course, knowing that the government is not taking our money before we see it, Americans can rest assured that they will be heard and that they can choose whether or not they want to contribute to the fiscal irresponsibility of their federal representatives.

But let’s discuss some of the details of the FairTax, how it will specifically turn our economy around, and how it will ensure long-term growth.

Under the FairTax, everything will be taxed – no exceptions. There are a few reasons for this. First of all, the FairTax is meant to be just that – fair. No industry will be exempt from having a sales tax added to their product which would give them an unfair advantage in the free market. Secondly, this practically eliminates the need for most lobbyists to our federal government. This is one of the most corrupt practices in our government and it is performed entirely to the detriment of the People and competitive business. Finally, everything is taxed because the plan includes a “prebate” – a monthly tax rebate paid in advance that will cover taxes on the basic necessities of life.

The prebate is a critical component of the FairTax. Everything we purchase today is taxed, whether we see it or not. With the FairTax, these embedded taxes will be eliminated and replaced with a single, visible sales tax. Since everything is taxed, the prebate will reimburse every head of household for all taxes paid on monthly purchases up to the poverty level. At the current rate, a two-adult household with two children will receive a monthly prebate of $537, whether they are rich, poor, or otherwise.* Any additional tax liability beyond that level is not covered. That gives a family of four a $28,000 spending allowance before they begin paying any federal taxes.*

How does this affect the poor? The poorest of Americans stand to benefit the most of any group. They will effectively pay no federal taxes whatsoever because of the prebate. In some cases, such as those living well below the poverty level, they will have a negative tax burden – which means their prebate will be more like an additional paycheck. Since savings accounts are not taxed, they will be able to save money by not purchasing unnecessary items and instead depositing their money into a tax-free bank account or other investments. Everything they earn, they will keep, and all purchases for their basic needs will be tax-free.

The middle class benefits in the same way, but with even more disposable income than they were previously accustomed to. They will be even more likely to invest their money and possibly have a chance at reaching the ranks of the upper class. Or they can spend it, live a more lavish lifestyle, and stimulate the economy as well.

Some people may ask, “Aren’t the rich getting off too easily?” No, not at all. The “rich” are the biggest consumers in our society. They purchase the most food and the most expensive food; they buy more clothes and more expensive clothes, bigger houses, nicer vehicles, and tons of extras that are all subject to the sales tax. They also have more elective surgeries, own multiple homes, and throw expensive dinner parties which is why food, healthcare, and other basic goods and services need to be taxed equally.

The FairTax will also have a positive impact on the dollar. We, as a nation, will benefit greatly by this plan. Not only will it make the United States the best place to do business and invest money, bring many jobs back to our shores that have left because of our oppressive tax laws, and increase our productivity and prosperity, but it will also strengthen the dollar as a result. At a time when the dollar is struggling to compete against other international currencies, the FairTax could revitalize foreign investment into our markets and cement the dollar and the U.S. economy as the best currency and market in which to invest. These developments will lead to Americans having more purchasing power with the same dollar. Furthermore, many economists believe that by implementing the FairTax, our economy could increase by over 10% in the first year alone.*

In addition to direct growth from investment, the U.S. economy will see an increased competitive advantage in the world markets. Since the FairTax is only applied inside the United States, our products will be cheaper when exported, as they will not be subject to any federal taxation. Conversely, imports will no longer enjoy the competitive advantage inside our economy, which will restore the recently vanishing “Made in America” product lines. In short, our economy will benefit in all respects without having to worry about negotiating new international trade laws or trillion-dollar stimulus packages.

On of the biggest concerns about this plan is the tax rate. It is currently estimated at about 23% in order to remain revenue neutral. That may seem high at first glance, but considering all of the taxes it replaces, the prebate, and the fact that it is mostly a voluntary tax, 23% isn’t high at all. The maximum tax liability any individual will have is 23%, but a vast majority will come in well below that figure. Consider also that we generally pay about a 20-25% tax on every product we purchase today, we just don’t see it. Under the FairTax, product prices will practically break even. If you pay a $1.50 for a loaf of bread now, you will still pay about $1.50 – but after the FairTax has been added. The cost of the bread will actually decrease. However, you will be keeping your entire paycheck and you’ll be receiving a monthly prebate if you’re a citizen with a valid Social Security number.

Even with all of these added benefits of a new tax system, there is still another upside in the long run.

As GDP increases, revenues will increase to the government. If we are able to regain control of our federal government – which will be much easier under the FairTax – we can demand a lower tax rate as GDP and our quality of life rises. But just like any other government action or function, it must be monitored and kept in check by the People. Luckily, under this plan, we will have more power and influence in Washington D.C. than we do today.

With all of the recent government bailouts and talk of trillions of dollars yet to be spent, it is worth the effort to demand that our federal representatives strongly consider this plan. It could be the single, largest economic stimulus package our economy has ever seen. And it costs nothing…except for the paper on which it will be printed. I think that’s a sacrifice we would all be willing to make. National debt to the tune of over a trillion dollars annually for the next few years is something that is much more frightening than replacing our tax code for the benefit of the American People.

It’s time to stop punishing achievement, crippling ourselves in the international markets, and demanding more productivity from Americans while retaining a tax system that is inherently counterproductive.

If you’d rather have a stimulus package that boosts the economy indefinitely, instead of a one-time check from the government and a never-ending debt that will thwart our economy in the very near future, then start supporting real tax relief and investment into our markets by letting your congressmen know that you support the FairTax – and that if they don’t, then you cannot support them.

*Figures cited are from FairTax.org.