I woke up one day in early April a couple years ago, and got a surprise call from my accountant. She’d figured out the taxes for my wife and I, and much to my chagrin, we were going to owe a gargantuan amount of money.
THE MARRIAGE TAX
We didn’t fully understand why until later, but it seems that when you get married and live in TWO separate "primary households", (two homes with two mortgages) you get to write off a lot more on your Federal income taxes in aggregate. But now that we only had ONE "primary household" since we lived under the same roof (and a ‘rental property’) we no longer had the combined benefit of two mortgage interest deductions: Only one. The result was a massive 5 digit tax bill.
I got married and suddenly, we’re getting raked over the Federal Tax fires. As we struggled to pay this monstrosity, I said to myself – this is just not right.
TAX BRACKETS & THE AMT
A year later, after we’d made adjustments to our Federal Tax withholdings, we received a similar call early in April. It’d happened again: Despite saving a lot more for taxes, we owed another 5 digit tax bill. It seems this time, we’d gotten raises at work and were thus moved into another HIGHER tax bracket. To make matters worse, I suddenly became very familiar with this thing called the Alternative Minimum Tax (AMT) which is essentially a special tax scale that supercedes the normal tax scale that people pay on, if you make over a certain amount of money.
What’s especially frightening about the AMT is that you can’t deduct a lot of things you could under the standard income tax like Property Taxes, State/Local taxes, Medical Expenses, etc. and if your taxes calculated under the AMT tax scale is higher than the standard federal income tax, then that’s what you have to pay. So the more money we earned, the higher the percentage rate we were being taxed at increased – ANNND the fewer deductions we can take.
I got a raise at work, and now I don’t just have to pay more, I have to pay a disproportionately higher amount more. I said to myself – this is just not right.
WOW. The Fair Tax is a proposed national sales tax on new finished goods & services of 23%. In exchange, it eliminates all Federal Income taxes, Payroll taxes (social security, medicare, medicaid taxes that companies pay in conjunction with employee salaries that amount to 9.1% of each worker’s income), capital gains taxes, death/estate taxes, and it gives every citizen a monthly "prebate" or stipend to refund every family an amount of collected taxes to keep everyone at or below the poverty level from paying a dime of Federal taxes.
I still have a few questions however unlike the Forbes-advocated Flat Tax (a completely different idea from the Fair Tax), the Fair Tax did something I didn’t even think was possible: It collected the same amount of Federal Income taxes, while minimizing – even potentially reducing my Federal tax burden. (Because after all, if I don’t buy anything, I don’t pay taxes)
So how is this plan "revenue neutral" – i.e. make the same about of money as today’s income tax? You can’t of course ‘fabricate money’ out of thin air – it has to come from somewhere. But if not from people like me, then who? The key to how the Fair Tax works lies in what appears to be 3 ‘new’ sources of Federal Income Tax:
- TAX "SIDE-STEPPERS" & THOSE BENEFITING FROM TAX LOOPHOLES
The average citizen pays 25% in Federal income taxes. Guess what percentage income tax the "wealthy" pay? The answer is 15% or less. The reason for this is, typically, the rich don’t make income. They make INTEREST/CAPITAL GAINS on money that resides in banks or investments, and the tax on capital gains is 15%.
What’s even worse is that most of these folks know "a way" to keep money out of sight from the IRS (Bahamas, Brazil, Switzerland, etc.) meaning that they make interest/capital gains tax free on much of what they have.
The Fair Tax doesn’t worry about income or capital gains. It doesn’t tax them. Instead it taxes purchases of new goods & services so if they buy a new yacht or a new car, they’re going to pay their federal taxes. Buying gas for that new car or boat? Taxes. Any new good or services that the person consumes is taxed.
- THE UNDERGROUND ECONOMY
The average legal business contributes an additional 9.1% of their total payroll (above and beyond worker’s salaries) to pay for federal payroll taxes. These taxes along with a matched amount from workers, pay for Social Security, Medicare, & Medicaid.
So guess how much drug pushers, illegal gamblers, & underground import companies pay in payroll taxes? The answer is ZERO. And because it’s impossible to find these folks much less monitor them, they never get taxed, ever, despite the huge amount of money that goes through their ventures.
Now, since these people will pay no income taxes but they’ll have to pay a sales tax on every bottle of liquor or Hostess Cupcake they buy in their daily lives, they’ll naturally be paying taxes, and monitoring the 5M legitimate businesses in America is a 100x easier to do than monitoring 300M individual citizens.
The proposed Federal Tax incidentally includes the INTERNET – the biggest tax loophole in America. Why should someone be exempt from paying taxes just because they’re buying a book across a border, where as a local book retailer making a contribution to the local economy has to pay taxes and be at a disadvantage to the Amazon.com’s of the world. Ludicrous.
- TOURISTS & UNDOCUMENTED IMMIGRANTS
Visitors & undocumented immigrants pay absolutely no Federal income tax to sustain the US economy – yet they enjoy all the benefits of federally funded hospitals, law enforcement, fire & rescue organizations and other services. Now, since they’ll be paying an embedded federal tax at retail stores for any goods & services they purchase, they’ll have no choice but to contribute to the Federal coffers.
The kicker here however is that NON-CITIZENS DO NOT GET THE PREBATE. Without citizenship, there is no funds distributed to these folks’ households to bring them up to the poverty line. They get no free lunch any more. The only way to get the prebate is to be a citizen of the US, encouraging immigrants to apply for citizenship legally & fairly.