“Our federal income tax has become the single largest contributor to job loss and capital flight.” – The FairTax Book
It should come as little surprise that the origins of the income tax movement came with a call to “Soak the Rich”, by employing an envy tax on high earners. From its inception, the goal of the income tax was increasingly a redistribution scheme to make everyone more equal. In 2019, 97.7 percent of income taxes were paid by the top 50 percent of income earners, with the top one percent paying a full 38.8 percent. At the same time, more than half of all American households received more entitlement benefits than they paid in taxes. As tax codes became increasingly progressive, the result was a loss in entrepreneurship and personal achievement, making job expansion and economic growth less attainable.
With a tax code that has grown to more than 60,000 pages, it may be hard to believe that our early income taxes were paid by only one-half of 1 percent of all American workers. Since then, the income tax system has exploded into a complex web of rules and regulations, that even the IRS is incompetent to interpret. To address the evolving tax structure and a growing contempt for the IRS, other alternatives have been considered including a flat tax, a European Value-Added Tax (VAT), and a sales tax.
One promising option is the FairTax Plan, a consumption tax first introduced by Congress in 1999. Crafted to maintain the same level of revenue as the current system, but one that is less anti-growth, a new bill, HR 25, has once again been introduced, eliminating the IRS and replacing government revenues with a national tax on the sale of new goods and services. The latest iteration of the FairTax plan reintroduced in 2023, would end all taxes beginning in 2025, shutter the IRS in 2027, and rely exclusively on a national sales tax to cover all government liabilities. To implement the FairTax, the 16th Amendment, allowing for an income tax, would need to be repealed.
In Neal Boortz’s 2005 book, “The FairTax Book”, Boortz makes the case for an end to the complicated and illogical income tax. Not only would his proposed plan end all income tax, payroll tax, capital gains tax, and gift taxes, but the proposed legislation would also render the IRS unnecessary, ending tax planning, tax accounting, tax audits, litigation, and collection. The implementation of a FairTax plan would also result in the elimination of the alternative minimum tax, corporate tax, self-employment tax, and estate taxes. There would be no quarterly or annual reporting requirements and no further redistribution of income from one family to another.
Included in Boortz’s proposed plan is a 23 percent sales tax that was actuarially determined as the amount necessary to cover existing federal expenditures. Since taxes are a major cost of doing business, the Harvard Economic Department determined that an embedded tax of 22 percent already exists in the current pricing of products and services. Thus, once the FairTax is implemented, these entrenched taxes would be removed and replaced with the FairTax, leaving goods and services priced virtually as they are today. As the economy grows, so will federal revenues, leading to the stabilization of Social Security and Medicare, currently underfunded and in danger of insolvency.
Since the FairTax is a regressive tax, as it applies equally to all citizens, a prebate to cover the taxes on essential goods up to the poverty level would be provided every month. For example, a family of four would be given an annual consumption allowance of $25,000 in essential goods. With an estimated $6,000 in taxes on those goods, the family would receive a prebate of $500 a month. As an alternative, a discount rate could be assigned to essential goods, with higher rates given to both non-essential and luxury goods.
Once the FairTax plan is in place, each state would be obligated to collect the national sales tax from businesses, keeping one-quarter of 1 percent to pay for its administrative costs. The rest would be forwarded to the Treasury Department to cover the full cost of the federal government including Social Security and Medicare. Since 45 states already have retail sales taxes in their states, only 5 others (AK, MT, DE, NH, and OR) would need to add this component to comply with their new obligations.
With the FairTax plan in place, the consumption tax would collect the same amount of taxation as the income tax. Workers would begin receiving 100 percent of their salaries, less any health insurance deductions, etc. With goods and services priced essentially the same as they are today, and with a pre-bate on necessities, citizens would have additional resources to either save or invest. The implementation of the FairTax would lead to the abolition of the IRS including nearly 100,000 federal workers, currently paid by the taxpayers, along with their 12.3 billion dollar annual budget.
Repatriated money would return to American shores to be used for investment and economic growth, making America the most competitive in the world. Personal information, like income, investments, and property, would no longer be the business of the government. Since there would be no cost to the citizens for complying with the sales tax, citizens would no longer need to look for ways to evade paying their taxes. The FairTax plan would also end the necessity for a shadow economy, where workers are paid wages outside the knowledge of the government.
While the current tax base consists exclusively of the working public (about 158 million), a shift to a national sales tax would include every American (330 million) plus foreign visitors (another 50 million), with the full cost of government shared by all.
Over the past sixty years, average tax receipts in America went from $577 per person per year in 1963, to $14,030 in 2023, based on total gross taxes and population totals. That is nearly a 2500 percent increase in tax receipts, despite a growing population. With promises of a growing economy, the FairTax plan would likely produce the opposite. As the economy grows, federal receipts grow, leading to the possibility to reduce the consumption tax on products. A win for all.
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